/ 



AMERICAN CITIZEN SERIES 

EDITED BY 

ALBERT BUSHNELL HART, LL.D. 



PRINCIPLES OF ECONOMICS 

EDWIN R. A. SELIGMAN, LL.D. 



By the Same Author 



Owen and the Christian Socialists. 

1886 
Railway Tariffs and the Interstate 

Commerce Law. 1887. 
Progressive Taxation in Theory and 
Practice, 2d ed. 1908. 

French Translation, 1908; Spanish 
Translation, 1913. 
The Shifting and Incidence of Tax- 
ation, 4th ed. 1 92 1. 

ItaHan Translation, 1906; French 
Translation, 191 1; Japanese 
Translation, 19 10. 
The Income Tax, 2d ed. 1914. 

French Translation, 191 3 
The Economic Interpretation of 
History, 2d ed. 1907. 

Japanese Translation, 1905, Russian 
Translation, 1906; Spanish Trans- 
lation, 1907; French Translation, 
1910. 
Essays in Taxation, 9th ed. 1921. 

Russian Translation, 1909; French 
Translation, 1914. 



american Citizen @etie0 



Principles of Economics 



WITH SPECIAL REFERENCE 
TO AMERICAN CONDITIONS 



EDWIN R^'^aV^'SeLIGMAN, LL.D. 

MCVICKAR PROFESSOR OF POLITICAL ECONOMY, 
COLUMBIA UNIVERSITY. 



NINTH EDITION, REVISED 



LONGMANS, GREEN AND CO. 

FOURTH AVENUE & 30TH STREET, NEV7 YORK 

39 PATERNOSTER ROW, LONDON 

BOMBAY, CALCUTTA, AND MADRAS 

I92I 



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f9hl 

COPYRIGHT, 1905, 
BY LONGMANS, GREEN, AND CO. 

COPYRIGHT, 1909, 
BY LONGMANS, GREEN, AND CO. 

COPYRIGHT, 1914, 
BY LONGMANS, GREEN^ AND CO. 

First Edition, October, 1905 

Second Edition, revised, September, 1906 

Third Edition, revised and enlarged, 

September, 1907 
New Impression, revised, August, 1908 
Fourth Edition, revised and enlarged, 1909 
Fifth Edition, revised, 19 12 
Sixth Edition, revised and rewritten, 1914 
Seventh Edition, revised, 191 6 
New Impression, January, 1919 
Eighth Edition, revised, 1919 
Ninth Edition,/revised, 1921 
Russian Translation, 1907 • 

Japanese Translation, 1907 
French Translation, 1921 

'■il'1187 

A3 



PRINTED IN THE UNITED STATES OF AMERICA 



PREFACE TO THE SIXTH EDITION 

IN the present edition the introductory matter has been 
re-written. In the body of the book chapters have 
been added on the Control of Trusts, Labor Legislation 
and Labor Insurance. This has necessitated a compression of 
the chapters on money and credit, but room has nevertheless 
been found for a treatment of the Federal Reserve Act. In 
other respects also the discussion and references have been 
brought down to date. It is my hope that in this revised 
form the work may continue to enjoy the favor which has 
hitherto been so generously accorded to it. 



EDWIN R. A. SELIGMAN. 



Columbia University, 
New York, July, 19 14 



FROM Tl 
PREFACE TO THE FOURTH EDITION 

IN the explanatory note which accompanied the first 
edition of this work, it was stated that "The object 
of the author is not only to give the salient facts of 
economic life, and to analyze them in the light of modern 
research, but also to present a point of view from which 
to approach the great questions of modern economic 



vi Preface to the Fourth Edition. 

policy. In the second place the author believes that the 
function of economics is not only to explain what actually 
exists, but to show how it has come to exist, and to fore- 
cast both the probable and the ideal future. Throughout 
the entire work the author endeavors to reconcile the his- 
torical and the a priori methods, and to provide an analysis 
of existing industrial society in the light of a treatment 
which, while seeking to emphasize the importance of wealth, 
lays especial emphasis on the human side of the subject and 
the subordination of wealth to man." The justification of 
this attempt is evident from the unexpected demand for the 
work, which has led to a constant succession of new editions. 
Of the suggestions and criticisms that have been made in 
the various reviews of the book, only one seems to call for 
mention. Some surprise has been expressed that so little 
attention has been devoted to the problems of taxation — a 
field which the author has elsewhere somewhat assiduously 
cultivated. The intentional omission is due to the convic- 
tion that it is inexpedient to attempt a treatment of public 
finance in a short treatise on the principles of economics. 
The science of finance is indeed in one sense a part of eco- 
nomics, but in another and better sense a quasi-independent 
science. The attempt to treat the problems of finance in a 
few chapters at the end of a treatise on economics, as do 
most of the English works, is bound to be unsatisfactory in 
the extreme. There is no more reason so to include Finance 
than there would be to include Statistics or any other semi- 
independent discipline. A treatment of finance that, is in 
any sense adequate would require a volume. It is my hope 
in the not far distant future to issue such a companion 
volume. 



Contents 



SUGGESTIONS FOR STUDENTS AND GENERAL 
REFERENCES 

Page 
I. General Treatises in English xix 

II. General Treatises in Foreign Languages xxii 

III. Periodicals xxiii 

IV. Dictionaries and Cyclopedias xxix 

V. Government Documents 

A . Local and State Publications . xxix 

B. National Departmental Publications xxxii 

C. Congressional Documents xli 

D. Indexes xliv 

E. British Official Publications xliv 

VI. Semi-Ofeicial Publications xlvi 

VII. Bibliographies and Finding Lists xlvii 

VIII. List of Select Books 1 

Part I 

INTRODUCTION 

Chapter 
I. Fundamental Concepts. 

1. References 3 

2. Economic Life . 3 

3. Economics or Political Economy? 6 

4. The Meaning of Wealth 8 

5. Wealth and Man 13 

6. The Measure of Wealth — Income and Capital. ... 15 

7. Wealth, Money, and Property . 19 

8. Public and Private Wealth 21 

vii 



viii Contents Parts I., II. 

Chapter Page 

II. Economic Law and Method. 

9. References 24 

10. Meaning of Economic Law 24 

11. Methods of Economic Investigation 28 

12. Relation of Economics to Other Sciences 29 

13. Relation of Economics to PoHtics and Other Moral 

Sciences 31 

14. Scope of Economics 35 

Part II 

ELEMENTS OF ECONOMIC LIFE. 

BOOK I. — FOUNDATIONS OF ECONOMIC LIFE. 

III. The Natural Environment. 

15. References 37 

16. Climatic and Geological Conditions 37 

17. The Flora, the Fauna, and the Geographical Location 41 

18. Changes in Environment 43 

19. Changes in Location 46 

IV. The Population. 

20. References 49 

21. Density of Population 49 

22. Concentration of Population 52 

23. Distribution of Population 54 

24. Increase of Population 56 

25. Migration of Population 60 

26. The Law of Population 62 

BOOK 11. — DEVELOPMENT OF ECONOMIC LIFE AND 

THOUGHT. 

V. The Economic Stages. 

27. References 67 

28. Economic Development 67 

29. Primitive Technique 69 

30. Transition from the Lower Stages of Civilization. ... 72 

31. Self-sufhcing or Isolated Economy 75 

32. Trade or Commercial Economy 77 

SS- Capitalist or Industrial Economy 81 



« 



Part II. Contents ix 

Chapter Page 

VI. The Historical Forms of Business Enterprise. 

34. References 85 

35. Primitive Economic Activity — The Clan 85 

36. The Family 87 

37. Help or Hire System 90 

38. Handicraft System 91 

39. Domestic System 93 

40. Factory System 95 

41. Associated and Corporate Enterprise 96 

VII. Economic Development of the United States. 

42. References 100 

43. Early Period of American Economic Life 100 

44. Growth of American Industry in the Nineteenth Century 102 

45. Recent Development of American Industry 104 

46. Modern Problems of America 106 

VIII. Development of Economic Thought. 

47. References 109 

48. Economic Theory in Classic Antiquity 109 

49. Mediaeval Economic Theory 112 

50. The Mercantile Doctrine , . . . 116 

51. Adam Smith and the Physiocrats 118 

52. Ricardo and Modern Economics 121 

BOOK III. — CONDITIONS OF ECONOMIC LIFE. 

IX. Private Property. 

53. References 125 

54. Origin of Private Property 125 

55. Growth of Property in Land 128 

56. Theories of Private Property 131 

57. Limits of Private Property 134 

58. Content of Property Rights 136 

X. Competition. 

59. References 139 

60. Nature of Competition 139 

61. Forms of Competition 141 

62. Dangers of Competition , 145 

63. Limits of Competition 147 

64. Substitutes for Competition 150 



X Contents Parts II., III. 

Chapter Page 

XI. Freedom. 

65. References 154 

66. Origin and Growth of Slavery 154 

67. Decay and Disappearance of Slavery 158 

68. Liberty of Economic Action 163 

69. Various Kinds of Economic Freedom 165 

70. Individual Liberty as a Social Concept 171 



Part III 

STRUCTURE AND PROCESS OF ECONOMIC LIFE. 
BOOK I. —VALUE: GENERAL PRINCIPLES. 

XII. The Meaning of Value. 

71. References 173 

72. Original Meaning of Value 173 

73. Marginal Utility — Law of Diminishing Utility . . . .175 

74. Individual and Social Value 179 

75. Value in Exchange 182 

76. Value and Price 184 

77. Value and Marginal Increments of Wealth 185 

XIII. The Measure oe Value. 

78. References . 189 

79. Meaning of Cost 189 

80. Individual and Social Cost 192 

81. Cost and Surplus 194 

82. Cost and Utihty 198 

83. Social Surplus and Progress 201 

XIV. The Capitalization of Value. 

84. References 204 

85. Value and Rent 204 

86. Law of Depreciation 206 

87. Law-of Future Estimates 209 

88. Law of Diminishing Returns .. 212 

89. Forms of Value 214 

90. Value as a Differential 217 

91. Relation of Rental and Capital Values 220 



Part III. Contents 



XI 



Chapter Page 
XV. Determination or Market Value. 

92. References 223 

93. Demand and Supply 223 

94. Market and Normal Price 224 

95. Conditions of Exchange — Law of Comparative Utilities 

and Comparative Costs 226 

96. Rate of Exchange — Barter 227 

97. One Seller and One Buyer 229 

98. Monopoly 231 

99. Competition 234 

100. Conclusions 235 

XVI. Determination op Normal Value. 

loi. References 241 

102. Normal Demand — Elasticity of Demand 241 

103. Normal Supply — Cost of Production 244 

104. Law of Marginal or Maximum Cost 247 

105. Law of Minimum Cost 249 

106. Elasticity of Supply — Law of Varying Cost 251 

107. Law of Joint Cost 253 

108. Equilibriimi of Normal Demand and Normal Supply . 255 

109. Influence of Normal Price upon Market Price .... 256 
no. Normal Monopoly Value 258 

XVII. The General Law of Value. 

111. References 262 

112. Value and Cost of Production 262 

113. Value and Efficiency 264 

114. Efficiency and Capitalization 268 

115. Valuation and Taxation 269 

116. Valuation and Regulation 273 

117. Valuation and Investment 275 



BOOK IL — VALUE AND PRODUCTION. """^ 

XVIII. Character and Factors of Production. 

118. References 278 

119. Production: Its Meaning and Relation to Consumption 278 

120. Kinds of Production 281 

121. Factors of Production 283 

122. Production and the Producer 285 




Xll 



Contents Part III. 



Chapter Page 

XIX. Labor. 

123. References 288 

124. Meaning of Labor 288 

125. Cost of Labor 289 

126. Efficiency of Labor 292 

127. Division of Labor — Nature and Advantages .... 293 

128. Division of Labor — Defects 298 

129. Combination of Labor 299 

130. Supply of Labor \ . 301 

XX. Land. 

131. References 304 

132. Land as a Separate Factor of Production 304 

133. Fertility of Land 308 

134. Situation of Land 311 

135. Cultivation of Land . 313 

XXL Capital. 

136. References 317 

137. Kinds of Capital 317 

138. Function of Capital 320 

139. Creation and Growth of Capital 323 

140. Nature and Influence of Capital 326 

141. Investment of Capital 329 

XXII. Enterprise — The Concentration of Production. 

142. References 33$ 

143. The Meaning of Concentration 333 

144. Large-Scale Production 335 

145. Large-Scale Agriculture 338 

146. Consolidation and Integration of Production 341 

147. Combination and Efficiency 345 

148. Limits of Combination 349 

BOOK III. — VALUE AND DISTRIBUTION. 

XXIIL Profits. 

149. References 352 

150. The Shares in Distribution 352 

151. Ordinary Profits 354 

152. Aleatory Profits 358 

153. Speculative Profits: Nature 360 



Part III. Contents 



Xlll 



Chapter Page 

Profits (Continued). 

154. Speculative Profits: Function 364 

155. Monopoly Profits 368 

156. Regulation and Justification of Profits 370 

XXIV. Rent. 

157. References y/^ 

158. Nature of Rent 373 

159. Relation of Land Rent to Other Rents 375 

160. Rent and Price 378 

161. Growth of Land Rent 381 

162. Land Rent and Land Tenure 385 

163. Justification of Land Rent 389 

XXV. Interest. 

164. References 394 

165. Nature of Interest 394 

166. Interest and Forbearance 398 

167. Interest and Productivity 401 

168. Course of Interest 405 

169. Tendency of Interest to a Minimum ........ 407 

170. Regulation of Interest 410 

XXVI. Wages. 

171. References 413 

172. Nature of Wages 413 

173. Wages and Cost 416 

174. Wages and Efficiency 418 

175. Rate of Wages 421 

176. Course of Wages 423 

177. Variations in Wages . 425 

178. Wages and Profits 429 

XXVII. Wages, — The Labor Problem. 

179. References. 432 

180. Labor Organizations 432 

181. Strikes 437 

182. Boycotts 440 

183. Profit Sharing and Co-operation 443 

184. Arbitration and Conciliation 446 



xiv Contents Part III. 

BOOK IV. — VALUE AND EXCHANGE. 

Chapter Page 

XXVIII. Money. — Nature and Value. 

185. References 449 

186. Origin and Functions of Money 449 

187. Value of Money 453 

188. The Quantity Theory 458 

189. The Price Level 461 

190. Distribution and Stability of Money 464 

XXIX. Money. — Practical Problems. 

191. References 470 

192. Coinage Problems 470 

193. Choice of the Money Standard 475 

194. Bimetallism , 479 

195. Adoption of the Gold Standard 483 

196. Paper Money . 488 

XXX. Credit and Banking. 

197. References 496 

198. Nature and Forms of Credit 496 

199. Development of Banking 501 

200. Modern Bank Operations 506 

201. Bank Reserves 511 

202. Credit and Prices ' . . . . 518 

XXXI. Credit and Currency. 

203. References 521 

204. Banks of Issue 521 

205. Regulation of Note Issues 525 

206. The American Systems 528 

207. The Money Rate 533 

208. The Federal Reserve Act 538 

209. Credit and Crises 543 

209^ The Federal Farm Loan Act 546* 

XXXII. International Trade. 

210. References 547 

211. Basis of International Trade ............ 547 

212. Rate of International Exchange 552 

213. Growth of Free Trade 556 

214. The Argument for Protection 560 

215. The Argument for Free Trade 566 

216. Conclusion 567 



Parts III., IV. Contents xv 

Chapter Page 

XXXIII. Transportation. 

217. References 572 

218. Transmission of Intelligence — The Post-OiSfice. . . .572 

219. Railway Development 575 

220. Nature of Railway Business 577 

221. Principle of Railway Charges 581 

222. Classification 584 

223. Discrimination 587 

224. Railway Regulation ; 593 

XXXIV. Insurance. 

225. References 598 

226. Nature of Insurance 598 

227. Growth of Insurance 601 

228. Theory of Insurance 606 

229. Methods and Regulation of Insurance 609 

Part IV 

GOVERNMENT AND WEALTH 

XXXV. Socialism and Public Ownership. 

230. References 612 

231. Socialism 612 

232. Development of Public Ownership 615 

233. Conditions of Public Ownership 619 

234. Municipal Monopolies 623 

235. Government Regulation 627 

236. Bounties and Subsidies 629 

XXXVI. The Control of Trusts. 

237. References 632 

238. The Causes of Trusts 632 

239. The Effects of Trusts 634 

240. The Prohibition of Trusts 638 

241. The Regulation of Trusts 640 

XXXVII. Labor Legislation. 

242. References 643 

243. The Employment of Children and Women 643 

244. The Protection of Life, Health and Comfort 646 

245. Regulation of the Hours of Labor 648 

246. The Minimum Wage 650 



xvi Contents Part IV 

Chapter Page 

XXXVIII. Social Insurance. 

247. References 655 

248. The Reasons for Social Insurance 655 

249. Accident Insurance 657 

250. Health Insurance 660 

251. Old Age Insurance 662 

252. Invalidity Insurance 664 

253. Unemployment Insurance 665 

XXXIX. Poverty and Progress. 

254. References 669 

255. Luxury 669 

(256. The Facts of Poverty 674 

^257. The Causes of Poverty 678 

258. The Relief of Poverty 682 

259. The Prevention of Poverty 685 

260. The Future of Economic Life 688 

261. The Role of Economics 692 

INDEX 695 



Maps and Diagrams 



Page 
Distribution of Population colored, facing 50 

Number of Inhabitants to the Square Mile, 

by States and Territories in 1910 " 52 

Population according to Age Distribution 55 

Foreign Immigration to the United States, 

1840-1920 following 60 

Increase of Population in Principal Coun- 
tries of Europe, 1 800-1 920 facing 61 

Population: 

(i) Total Foreign Born, 1850-1910 "j 

(2) Proportion each of leading nation- [- . . . colorea ^ following 62 

alities and foreign born J 

Constituents of the Population of States 
and Territories, 1910 colored, " 64 

Annual Value of Products 1 ^ . 

> facing 104 

Value of Exports of Manufactures J 

Production of Corn \ . • ^ 

( . . facing 100 

Production of Wheat ) 

Production of Oats \ ,, 

> " 107 

Production of Cotton J 

Capital Invested at each Census \ .. o 

f 108 

Average Number of Wage Earners ) 

Value of Products "i 

} ' 109 

Proportion of Wage Earners to Population j 

Hand and Machine Labor, Selected Units (a) " 296 

Hand and Machine Labor, Selected Units (b) " 297 

Wages, Hours of Work, etc colored, " 424 

Results of Strikes, etc colored, " 438 

Relative Wholesale and Retail Price of Fresh 

Beef, 1890-1903 " 462 

.Relative Prices of Raw and Manufactured Com- 

jnpdjtieS; 1890-1912 ' 463 

xvii 



y 



y 



XVlll 



Maps and Diagrams 



Page 



following 464 



General Level of Prices in England, 1 790-1 920 . . . 
Comparative Movement of Wholesale Prices in the 

United States, Great Britain and Germany, 1 890-191 1 . . facing 466 
Movement of Wholesale and Retail Prices in the 

United States, 1890-1913 " 4^7 

Wholesale Prices, 1914-1921 " 468 

Production of Silver, 1875-1919 " 47^ 

Production of Gold and Silver, 1 845-19 1 9 ........ " 476 

Production of Gold, 1880-1919 " 477 

Production of Gold and Silver since the Discovery of America " 478 

The Fall in the Value of Silver since 1873 " 479 

Bank Notes, Paper Money, etc., 1 878-1 920 " 532 

Exports and Imports of Merchandise, 1 872-1920 " 551 

Railway Consolidation, 1920 " 57^ 

Reduction of Freight Rates, 1 867-1900 following 580 

Percent of Total Expenditure, etc., Normal Famihes, colored, facing 674 
Poverty Chart (reproduced by permission from 

Rowntree's "Poverty") 680 



/ 



/ 

y 



SUGGESTIONS FOR STUDENTS AND GENERAL 

REFERENCES 

I. General Treatises in English 

'Or the older works the treatises of Adam Smith and of some 
of the so-called Classical School are still indispensable to 
students. The three founders are: 

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth 
of Nations. (London, 1776; recent editions, with introduction 
and notes by Edwin Cannan, 2 vols., 1904; and, with introduction, 
by Edwin R. A. Seligman in Everyman's Library, 2 vols. n. d. [1910].) 

Malthus, Thomas Robert. An Essay on the Principle of Popula- 
tion, or a View of its Past and Present Effects on Human Happiness. 
(London, 1798; 8th ed., 1878.) 

RiCARDO, Davh). Principles of Political Economy and Taxation. (Lon- 
don, 181 7.) — This work, together with his other important writings, 
has been edited by J. R. McCulloch in one volume under the title 
of The Works of David Ricardo with a Notice of the Life and Writings 
of the Author. (1846; frequently reprinted since.) 

The principal modern expounders of the general system set 
forth by Smith, Malthus and Ricardo are: 

Mill, John Stuart. Principles of Political Economy with some of 
their Applications to Social Philosophy. (London, 1848; 5th ed., 
1880.) — This was the most widely read work from 1850 to 1890. 

Senior, Nassau William. Political Economy. (London, 1850; 6th ed., 
1872.) — Acute and original. 

Cairnes, J. E. Some Leading Principles of Political Economy newly 
Expounded. (London, 1874.) — Abstract, but weighty. 

SroowiCK, Henry. The Principles of Political Economy. (London, 
1883.) — Critical and philosophical, but somewhat remote from 
actual life. 

xix 



XX Suggestions 

The reaction against the Classical School was inaugurated in 

England by 

Jevons, W. Stanley. The Theory of Political Economy. (London, 
1871; 4th ed., 191 1.) — A work of the first magnitude. The same 
author's posthumous Principles of Economics (London, 1905) is 
only a torso. 

Of modern treatises the best are as follows: 

Marshall, Alfred. Principles of Economics, (Vol. I, London, 1890; 
8th ed., 1920.) — 'The fullest and most elaborate of recent works. 

PiERSON, N. G. Principles of Economics. (Translated by A. A. Wotzel, 
2 vols., London, 1902-1912.) — -Dr. Pierson was formerly Prime 
Minister of the Netherlands. A virile work, especially strong in 
the financial sections. 

Nicholson, J. Shield. Principles of Political Economy. (3 vols., 
London, 1 893-1 901.) — On the lines of Mill, but brought down 
to date and with much historical material. 

Pantaleoni, Maffeo. Pure Economics. (Translated by T. Boston 
Bruce. London, 1898.) — An acute and profound work on funda- 
mental principles. 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. (Trans- 
lated by W. Smart. London, 1891.) 

WiESER, Friedrich VON. Natural Value. (Translated by C. Mal- 
loch, London, 1893.) — This book and the one immediately preceding 
are the two chief works of the Austrian School. 

Three recent elementary books are: 

Cannan, Edwin. Wealth. A Brief Explanation of the Causes of Economic 
Welfare. (London, 1914.) Suggestive and well written. 

Chapman, S. J. Outlines of Political Economy. (London, 1911; 3d ed., 
191 8.) A useful compendium. 

Clay, H. Economics, an Introduction. (London, 1916.) Emphasizes 
the ethical point of view. 

Still briefer are: 
CuNNisoN, J. Economics. (London, 1920.) 

Kirkcaldy, A. W. Wealth, Its Production and Distribution, (London, 
1920.) 

Of American treatises the most important are: 

Walker, Francis A. Political Economy. (New York, 1883; 3d ed. 
1888.) — Until recently, the chief American production. ' 



.Treatises in English xxi 

Clark, John B. The Distribution of Wealth. (New York, 1899.) — 
Of fundamental and epoch-making importance. The same author's 
Essentials of Economic Theory (New York, 1907) covers a broader 
field. 

Hadley, Arthur Twining. Economics: An Account of the Relations 
between Private Property and Public Welfare. (New York, 
1896.) — Admirably written, but with a not entirely satisfactory 
, arrangement. 

Ely, Richard T. Outlines of Economics. (New York, 1893; 3d ed., 
revised by the author and T. S. Adams, M. O. Lorenz, and A. A. 
Young, 1916.) — In its new form, valuable and interesting. 

Seager, Henry Rogers, Principles of Economics. (New York, 1904; 
4th ed., 19 13.) — Displays a firm grasp of theory and a wide ac- 
quaintance with facts. In many respects the most available of exist- 
ing text-books. The same author has also published Economics. 
Briefer Course (New York, 1909). 

Fetter, Frank A. The Principles of Economics. (New York, 1904. 
Rewritten as Economic Principles, 2 vols., 1915.) — Novel and 
/ suggestive. 

Taussig, F. W. Principles of Economics. (2 vols.. New York, 191 1, 
2d ed., 1914.) — Clear and sensible, but on old lines. 

Fisher, Irving. Elementary Principles of Economics. (New York, 
191 2.) — Lays especial stress on value and money. 

During the past few years a number of series for more pop- 
ular consumption have appeared. They are not yet completed, 
and the whole number of volumes is not yet definitely settled. 
Among these are: Appleton's Business Series, and Problems of 
the War and Reconstruction, MacmiUan's Citizen's Library of 
Economics, Politics and Sociology, the Rural Text Book Series, and 
the American Social Progress Series, Longman's American Citizen 
Series, Holt's American Public Problem Series, Shaw's American 
Industry Series, Methuen's Series in Economics, and Ginn's 
Selections and Readings in Economics. 

On American Economic History attention is called especially 
to A Documentary History of American Industrial Society (Cleve- 
land, 10 vols., 1910-1911), and The Economic History of the 
United States, under the auspices of the Carnegie Institution 
(about 10 vols., 1914-). 



xxii Suggestions 

Convenient collateral reading will be found in: 

Marshall, Wright and Field. Materials for the Study of Elementary 
Economics. (Chicago, 19 13.) 

Hamilton, W. H, Readings on Current Economic Problems. (University 
of Michigan, 1914.) 

MouLTON, H. G. Principles of Money and Banking. (Chicago, 1916.) 

Phillips, C. A. Readings in Money and Banking. (New York, 1916.) 

Clark, Hamilton and Moulton. Readings in the Economics of War 

and Reconstruction. (Chicago, 191 9.) 
Materials for the Study of Business. Several volumes. School of Com- 

merce and Administration. (Chicago, 1921.) 

The more important works on special topics will be found in 
the References at the head of each chapter. 



II, General Treatises in Foreign Languages 

The leading foreign works are: 

Wagner, Adolf. Grundlegimg der Politischen Oekonomie. (3 vols., 
Leipsic; 3d ed., 1892-1894.) — By the chief advocate of "Profes- 
sorial Socialism." Erudite, with remarkable bibliographies. A 
French translation appeared in 1905. The same author's Theoretische 
Sozialokonomik, containing his university lectures, appeared in two 
volumes in 1907-1909. 

RoscHER, Wilhelm. Grundlagen der Nationalokonomie. Ein Hand- 
und Lesebuch. (5 vols., Stuttgart, 1 854-1 894; with new editions 
of the earlier volumes almost every year until his death in 
1894.) — By one of the founders of the Historical School. Con- 
tains an imposing array of historical notes. The first volume has 
appeared in English dress in 2 volumes. 

Cohn, Gustav. Grundlegimg der Nationalokonomie. Ein Lehrbuch 
fur Studirende. (3 vols., Stuttgart, 1885-1898.) — By the best 
stylist among the German economists. Conservative and interest- 
ing. The second volume has been translated into English under the 
title The Science of Finance. 



Foreign Treatises xxiii 

ScHMOLLER, GusTAV. Grundriss der allgemeinen Volkswirthschaftslehre. 
(2 vols., Leipsic, 1900-1904; 2d ed., 1908.) — A remarkable work 
by the former leader of the Historical School. Brilliant and fasci- 
nating, but weak in the theoretical parts. 

Philippovich, Eugen von. Grundriss der Politischen Oekonomie' 
(3 vols., Tubingen, 1893-1907; 5th-9th ed., 1911-1915.) — Sane, 
impartial and concise. In many respects the best German work. 

Pesch, Heinrich. Lehrbuch der N ationalokonomie. 3 vols., Freiburg 
VB, 1904-1913; 2d ed., 1914.) — From the Catholic standpoint. 

The Grundriss der Socialokonomik (10-12 parts, Tubingen, 1914-1921) 
is a comprehensive series by the younger German economists, cover- 
ing the whole field of economics. 

Leroy-Beaulieu, Paul. Traite Theorique et Pratique d'jSconomie 
Politique. (5 vols., Paris, 1895; 6th ed., 1914.) — A pellucid work 
by the former chief of the orthodox school in France. 

Gide, Charles. Principes d'Economie Politique. (Paris, 1887; nth ed., 
1908.) — The most widely read European text-book. American 
translations appeared in 1889 ^^id 1904. The author's Cours d'Eco- 
nomie Politique (Paris, 4th ed., 1918-1919, 2 vols.) is an enlarged 
version of the same book. An Enghsh translation appeared in 1914. 

Landry, Adolphe. Manuel d'Economique. (Paris, 1908.) — An ex- 
cellent French work by a French statesman. 

Pareto, Vilfredo. Cours d'Economie Politique. (2 vols., Lausanne> 
1896-1897.) — An acute work, combining the mathematical point 
of view with historical details. His Manuel d'Economie Politique 
(Paris, 1909) is a translation of a briefer Italian work. 

CoLSON, C. Cours d'Economie Politique. (3 vols., Paris, 1907; 3d 
ed., 6 vols., 1915-1919.) — By a prominent engineer. 

Perreau, Camille. Cours d'Economie Politique. (2 vols., Paris, 1916.) 
Truchy, H, Cours d'Economie Politique. (Paris, 192 1.) 



III. Periodicals 
Classified by countries the chief periodicals are as follows: 

United States 

American Economic Association Publications. The publications of this 
Association, formed in 1886, include the Reports of the Proceedings of 
the Annual Meetings and a series of independent monographs. Up 



XXIV Suggestions 

to 1897 these were published at bi-monthly intervals. In 1S97 a 
series of shorter Studies was inaugurated, and larger volumes were 
occasionally published under the name of New Series. In 1901 the 
Studies were discontinued, and a Third Series was commenced. 
In 1908 a quarterly periodical known as The Economic Bulletin was 
added. In 191 1 this was replaced by The American Economic Review. 

The Quarterly Journal of Economics. Pubhshed for Harvard University. 
(Boston, 1 886-). 

Political Science Quarterly. Edited by the Faculty of Political Science 
of Columbia University. (New York, 1886-.) 

The Annals of the American Academy of Political and Social Science. 
(Bi-monthly, Philadelphia, 1890-.) 

The Journal of Political Economy. Published for the University of 
Chicago. (Quarterly to 1906, monthly thereafter, Chicago, 1892-.) 

The American Journal of Sociology. (Bi-monthly, Chicago, 1896-.) 

Quarterly Publications of the American Statistical Association. (Boston, 
1888-.) 

American Labor Legislation Revieio. (Quarterly, New York, 191 1-.) 
The Child Labor Bulletin. (Quarterly, New York, 191 2-.) 

Municipal Research. Issued by the Bureau of Municipal Research. 
(Monthly, New York, 1913-1919.) 

Johns Hopkins University Studies in Historical and Political Science. 
(Baltimore, 1883-. One volume a year, composed of several numbers. 
39 vols, and several extra volumes to 1921.) 

Columbia University Studies in History, Economics and Public Law. 
Edited by the Faculty of Pohtical Science. (New York, 1891-. 
Several volumes a year, each consisting of from one to four mono- 
graphs. 100 vols. [228 monographs] to 192 1.) 

Proceedings of the Academy of Political Science in the City of New York. 
Columbia University. (Bi-monthly, New York, 1910-.) 

Studies in Sociology, Economics, Politics and History. In Research Bulle- 
tins of the University of Iowa. (Iowa City, 1899-. 4 vols, to 192 1.) 

University of Illinois. Studies in the Social Sciences. (Urbana, 1912-. 
8 vols, to 192 1.) 



American Periodicals xxv 

University of Wisconsir Bulletin. Economics and Political Science Series . 
(Madison, 1904-1918. 9 vols.) Continued in Studies in the Social 
Sciences and History. (2 nos. to 1921.) 

University of Pennsylvania Series in Political Economy and Public Law. 

(Philadelphia, 1888-.) 
Harvard Economic Studies. (Boston, 1906-. 22 vols, to 192 1.) 
Cornell Studies in History and Political Science. (Ithaca, 1907-. 3 vols. 

to 1921.) 
University of California, Publications in Economics. (Berkeley, 1908-. 

4 vols, to 1 92 1.) 
University of Minnesota Studies in the Social Sciences. (Minneapolis, 

I9i3~- 5 nos. to 1921,) 

Economic articles of more or less permanent interest are also 
found in the monthlies like the North American Review, Review 
of Reviews, Atlantic Monthly, and in the v^eeklies like the Nation, 
New Republic, Outlook, Independent, Weekly Review, Annalist smd 
Survey. The special publications devotee^ to particular economic 
interests are too numerous to mention. Some of them will be 
found below under Section VI, Semi-Official Publications. 

Greater Britain 

The Economii Journal. (Quarterly, London, 1890-.) The Journal 
of the Britiih Economic Association, since 1903 called The Royal 
Economic Society. 

The Economic Review. (Oxford, 1891-1915.) Published quarterly for 

the Oxford University Branch of the Christian Social Union. 
Journal oj the Royal Statistical Society. (Quarterly, London, 1837-.) 

Economica. (Three times a year, London, 192 1-.) Edited by the London 
School of Economics. 

Studies in Economics and Political Science. (London, 1896-. 58 vols. 
tQ 192 1.) Edited by the Director of the London School of Eco- 
nomics and Political Science. 

Bulletin of the Department of History and Political and Economic Science 
in Queen's University (Kingston, Ontario, Canada. 38 nos. to 1921.) 

The monthly reviews like the Contemporary, Fortnightly, 
National, Nineteenth Century, Independent: and the British Quar- 
terly Review the Political Quarterly, the Round Table and the 
Edinburgh Review generally contain some articles of economic 
interest. The most important weeklies devoted to current 
economic topics are The Economist, The Statist and Common Sense, 



xxvi Suggestions 

Germany 

Jarbiicherfur N ationalokonomie und Statistik. (Monthly, Jena, 1863-.) 
Edited by Conrad until 1916, thereafter by Elster. 

Jahrbuch fiir Gesetzgebung, Verwaltung und Volkswirthschaft. (Quar- 
terly, Leipsic, 1877-.) Edited by SchmoUer to 1918, then by Schu- 
macher and Spiethoff. 

Zeitschrift fiir die gesamte Staatswissenschaft. (Quarterly, Tubingen, 
1 844-.) Edited by Biicher. 

Archiv fiir Sociale Gesetzgebung und Statistik. (Quarterly, Berlin, 1888- 
1903.) Edited by Braun. Continued as: 

Archiv fiir Sozialwissenschaft und Sozialpolitik. (Quarterly, Tubingen, 
1904-.) Edited by Sombart, Weber and Jaffe. 

Annalen fiir Soziale Politik und Gesetzgebung. (Bi-monthly. Berlin., 
191 2-.) Edited by Braun. 

Zeitschrift fiir Sozialwissenschaft. (Quarterly, Berlin, 1898-.) Edited 
by Wolf, and since 1910 by Pohle. 

Vierteljahrschrift fiir Sozial- und Wirthschaftsgeschichte. (Quarterly, 
1904-.) Edited by Bauer, Below, Hartmann and Kaser. 

Annalen des deutschen Reichs fur Gesetzgebtmg, Verwaltung und Volks- 
wirthschaft. (Monthly, Munich, 1868-.) Edited by Eheberg and 
Dyraff. 

Finanz- Archiv. (Quarterly, Stuttgart, 1884-.) Edited by Schanz. 

Archiv fiir Eisenbahnwesen. (Monthly, Berlin, 1875-.) Edited by von 
der Leyen. 

Thiinen Archiv contined in 191 2 as Archiv fiir die exakte Wirthschafts- 
forschung. (Jena, 1905-.) Edited by Ehrenberg. 

Die Neue Zeit. (Monthly, Stuttgart, 1883-.) Edited by Kautsky. 

Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung. 
(Quarterly, Leipsic, 1910-.) Edited by Griinberg. 

Marx Studien. (Vienna, 1905-.) Edited by Adler and Hilferding. 

Publications of the Verein fiir Sozialpolitik. (Several volumes a year, 
Leipsic, 18 73-.) 

Staats- und sozialwissenschaftliche Forschungen. (Leipsic, 1878-.) 
Edited by Schmoller [and since 1905 by Sering]. 

Sammlung nationalokonomischer und statistischer Abhaftdlungen des 



Foreign Periodicals xxvii 

staatswissenschaftlichen Seminars zu Halle. (Jena, 1877-.) Edited 
by Conrad. 

Munchener volkswirthschaftliche Studien. (Stuttgart, 1893-.) Edited 
by Brentano and Lotz. 

Ahhandlungen des staatswissenschaftlichen Seminars zu Jena. (Jena, 
1900-.) Edited by Pierstorff. 

Ahhandlungen aus dem staatswissenschaftlichen Seminar von Strasshurg. 
(Strassburg, 1893-1918, 34 nos.) Edited by Knapp. 

Kolner Studien zum Staats- iind Wirthschaftslehen (Bonn, 1912-.) 
Edited by A. Weber, Wygodzinski and Stier-Somlo. 

Tuhinger staatswissenschafiliche Ahhandlungen. (Stuttgart, 1902-.) 
Edited by Fuchs. 

Heidelherger volkswirthschaftliche Ahhandlungen. (Karlsruhe, 191 1-.) 
Edited by Gothein and Weber. 

Freiburger volkswirthschaftliche Ahhandlungen. (Karlsruhe, 191 1-.) 
Edited by Diehl and Schulze-Gavernitz. 

Socialgeschichtliche Forschungen. (Weimar, 1896-.) Edited by Bauer 
and Hartmann. 

Staatswissenschafiliche Studien. (Leipsic, 1893-.) Edited by Elster. 

Berner Beitrdge zur Geschichte der Nationalokonomik. (Bern, 1 886-.) 
Edited by Oncken. 

France 

Journal des Sconomistes. (Monthly, Paris, 1 843-.) Edited until 1909 
by Molinari and thereafter by Yves-Guyot. 

Revue d'Sconomie Politique. (Monthly, Paris, 1887-.) Edited by Gide. 

Revue d'Histoire Sconomique et Sociale. (Quarterly, Paris, 1908-.) 
Edited by Vouters and more recently by Aucuy and Picard. Until 
191 3 it was known as the Revue d'Histoire des Doctrines Economiques 
et Sociales. 

Revue de Science et de Legislation Financieres . (Bi-monthly, T iris, 1903-.) 
Edited by Jeze. ^ 

Reforme Sociale. (Paris, 1880-.) Bulletin of the Societe d'Economie 
Sociale. 

Bulletin de Statistique et de Legislation comparee. (Monthly, Paris, 
1877-.) 



xxviii Suggestions 

Annates des Sciences Folitiques. (Bi-monthly, Paris, 1886-.) 

Journal de la Societe de Statistique de Paris. (Monthly, Paris, i860-.) 

U ^conomiste Frangais. (Weekly, Paris, 1876-.) Edited by P. Leroy- 
Beaulieu until 1914 and then by Pierre Liesse. 

Bulletin de la Societe d'Economie Politique. (Annual, Paris, 1888-.) 
Succeeding the Annales of the same society published from 1846 
to 1887. 

Italy 

Giornale degli Economisti e Rivista di Statistica. (Monthly, Padova, 
1 875-1 878, and again Bologna and Rome, i8§6-,) Edited by Pan- 
taleoni, Beneduce and Mortara. 

Bulletin de Vlnstitut International de Statistique. (Biennially, Rome, 
1 886-.) Edited by Bodio. 

Belgium 

Revue J^conomique Internationale. (Bi-monthly, Brussels, 1904-1914.) 
Edited by Hennebicq. 

Austria 

Zeitschrift Jiir V olkswirthschaft Socialpolitik imd Verwaltung. (Quar- 
terly, Vienna, 1892-.) Edited by Philippovich, v. Plener and v. 
Wieser. ■ 

Wiener staatswissenschaftliche Studien. (Freiburg ^/B., 1898-.) Edited 
by Bernatzik and Philippovich. 

Studien zur Social-, Wirthschafts- und V erwaltungsgeschichte. (Vienna, 
1905"-) Edited by Griinberg. 

Holland 
De Economist. (Monthly, The Hague, 1 852-.) Edited by Bruyn-Kops. 

Denmark 

Nationaloekonomish Tidsskrlft. (Quarterly, Copenhagen, 1873-.) Edited 
by Jensen. 

• India 

Journal of the Indian Economic Society. (Quarterly, Bombay, 1918-.) 
Edited by Deole. 

Indian Journal of Economics. (Quarterly, Calcutta, 1919-.) Edited 
by Jevons. ■ 



Dictionaries xxix 

IV. Dictionaries and Cyclopedias of Economics 

Palgrave, R. H. Inglis, ed. Dictionary of Political Economy. (3 vols., 
London, 1894- 1899, with a supplement, 1908.) — An admirable 
work, but not devoting special attention to American conditions. 

Bliss, William D. P., ed. The Encyclopedia of Social Reform, including 
Political Economy, Political Science, Sociology and Statistics. (New 
York, 1897; 2d ed., 1908.) — Serviceable. 

Hart, Albert Bushnell and McLaughlin, Andrew C, eds. Cyclo- 
pedia of American Government. (New York, 3 vols., 1914.) — De- 
votes considerable attention to economic topics. 

Conrad, Elster, Lexis and Loening, eds. Handworterbuch der 
Staatswissenschaften. (6 vols., Jena, 1890-1894; 3d ed., 8 vols., 
1908-1911; new ed., 1921-.) — 'The most complete and elaborate 
cyclopedia of economics in. existence. 

Elster, Ludwig, ed. Worterhiich der Volkswirthschaft. (2 vols., Jena, 
1898; 2d ed., 1907.) — Of more importance to continental students. 

Schonberg, Gustav. Handbuch der Politischen Oekonomie. (3 vols., 
Tubingen, 1882; 4th ed., 1896-1898.) — Comprises a series of 
thorough and valuable monographs by the leading German specialists. 

Staatslexikon. Edited by the Gorres Society. (Freiburg i/B., 1889- 
1897, 5 vols.) — From the Catholic point of view. 

Stegmann and Hugo. Handbuch des Sozialismus. (Zurich, 1897.) — 
A Socialist Cyclopedia. 

Guyot, Yves and Raffalovich, A. Dictionnaire du Commerce, de 
r Industrie et de la Banque. (2 vols., Paris, 1898-1901.) — Useful 
for trade and finance. 

Say, Leon, and Chailley, Joseph, eds. Nouveau Dictionnaire d'Econo- 
mie Politique. (2 vols., Paris, 1891-1892; 2d ed., 1900.) — Inferior 
to both Palgrave and Conrad. 



V. Government Documents 
A. Local and State Publications 

A large amount of material on economic topics is published 
by the various American governments, — local, state and na- 
tional. The municipal governments of the chief American 



XXX Suggestions 

cities publish annually reports of their various city depart- 
ments. Among them, of economic interest, are the reports 
dealing with city finances, water, gas and electricity, charities, 
health, housing, transportation and the like, and in a few cases 
like Boston and New York the reports of the Departments or 
Bureaus of Municipal Statistics. New York City published 
for some years a good Municipal Year Book. 

The state governments publish a great variety of documents. 
Among the most important are the reports of labor bureaus. 
Of these, the best are those of New York and Massachusetts; 
but New Jersey, Pennsylvania, Illinois and a few others issue 
fairly good reports. The annual reports of the New York De- 
partment of Labor appear in three volumes, containing (i) the 
General Report of the Commissioner and the Report of the Bureau 
of Mediation and Arbitration, (2) the Report of the Bureau of 
Labor Statistics, and (3) the Report of the Bureau of Factory 
Inspection. Occasionally special reports are published, as on 
Labor Legislation, Employers^ Liability, Welfare Institutions, 
Old Age Pensions, Minimum Wage, etc. 

The reports of the Massachusetts Bureau of Statistics of 
Labor comprise the Annual Report on the Statistics of Labor, 
the Annual Report on the Statistics of Manufactures and vari- 
ous Special Reports. 

Both New York and Massachusetts also publish periodical 
bulletins, the Labor Bulletin of Massachusetts appearing every 
two months, the Department of Labor Bulletin of New York ap- 
pearing quarterly. The reports of the other states are not so 
valuable or voluminous, but often contain matter of importance. 
An Analysis and Index of all Reports issued by State Bureaus 
of Labor Statistics was published by the National Department of 
Labor in 1893, and has since then been brought down to date 
from time to time. The separate states publish in turn the 
annual proceeding of the National Convention of Chiefs and Com- 
missioners of the various Bureaus of Statistics of Labor in the 
United States, as well as of the International Association of 
Factory Inspectors of North America. 

The state governments also publish regularly the State 
Treasurers^ and Comptrollers^ Reports, Reports of Railroad or 



State Documents xxxi 

Public Service or Public Utility Commissions^ Reports of Bank 
and Insurance Examiners, Reports on Taxation, Reports of 
Inspectors of Food and Animals, Reports of Boards of Charities 
and Correction, Reports on Prison Labor, Reports on Mining 
Statistics, Reports of State Agricultural Experiment Stations, 
Reports of the Boards of Health, Reports of the Land or Public 
Domain Commissions, Reports of the Industrial Accident or 
Workmen^s Compensation Commissions or Boards, Reports of 
the Minimum Wage or Industrial Welfare Commissions or 
Boards and the like. A few also publish at regular intervals a 
State Census: the best is that of Massachusetts. 

Some of the states publish occasional reports of legislative 
or special committees. Of these the most common are the 
Reports on Taxation. A list of these will be found in the chapter 
on "Recent State Reports on Taxation" in Essays in Taxation by 
the author of this volume. Deserving of mention on other topics 
are the Massachusetts Reports on The Unemployed (1895); 
Street Railway Companies (1901 and 191 8); Corporation Laws 
(1903); Old Age Pensions (1910); Minimum Wage Boards (1911); 
and the New York Reports on Tenement Houses (1894 and 1901); 
Trusts (1897); Canals (2 vols., 1899); Insurance (8 vols., 1905- 
1906); Stock and Produce Exchanges (1909); Employers^ Liability 
and Unemployment (1910-1912); Factory Investigating Commis- 
sion (4 vols., 1913-1915); the New Jersey Report on Pension 
Funds (1918); the Minnesota Report on Employes^ Compensation 
(191 1); and the Ohio Report on Health and Old Age Insurance 
(1919). 

Until recently the only general periodical guides to the legisla- 
tion discussed in these reports were the Annual Comparative 
Summary and Index of State Legislation and the Annual Review 
of Legislation, both published by the New York State Library. 
These were discontinued in 191 2. Since 1910 the Division of 
Documents of the Library of Congress publishes a Monthly 
List of State Publications. A joint committee of State Li- 
brarians and American Law Librarians publish annually an 
Official I?idex to State Legislation. A quarterly survey of govern- 
ment reports will be found in the American Economic Review. For 
the earlier reports we may mention : 



xxxii Suggestions 

BowKER, R. R. State Publications. A Provisional List of the Official 
Publications of the several States of the United States from their Or- 
ganization. 3 vols., New York, 1905. 

Highly to be recommended is: 

Hasse, Adelaide R. Index of Economic Material in the Documents of 
the States of the United States. Prepared for the Department of Eco- 
nomics and Sociology of the Carnegie Institute of Washington. A 
separate volume, ranging from 66 to 1136 pages for each state. 
Twelve states completed to 191 8, and then discontinued. (Maine, 
New Hampshire, Vermont, Massachusetts, Rhode Island, New York, 
California, Illinois, Kentucky, Delaware, Ohio and New Jersey.) 

The Legislative Reference Department of tne Wisconsin Free 
Library Commission published for some years after 1905 a 
number of valuable Comparative Legislative Bulletins containing 
judicial decisions as well as the legislation of the chief foreign 
countries and the American commonwealths on various economic 
questions. The practice is now followed in a considerable number 
of other states. 

B. National Departmental Publications 

The publications of the national government are of three 
kinds: departmental issues, commission or board publications, 
and reports of congressional committees. 

The Department of Commerce now publishes the largest 
mass of material of interest to students of economics. As origi- 
nally organized in 1903, in addition to numerous new duties, it 
took ovei much work previously devolving upon other depart- 
ments. For details as to the present organization see the pub- 
lication: Department of Commerce, Condensed History, Duties, 
and Practical Operation of the Department and its Several Bureaus 
and Offices, together with Laws relating specifically thereto (19 13). 
Cf. the List of Publications of the Department of Commerce avail- 
able for Distribution. 19th ed., 192 1. 

The Department publishes annually the Report of the Secre- 
tary. The other publications are issued by the separate bureaus 
or divisions as follows: 

I. The Bureau of the Census. The Census is pubhshed 
every ten years. The most recent issues are The Twelfth Census 



National Publications xxxiii 

(1900, in 16 vols.), The Thirteenth Census (1910), in n vols., 
The Fourteenth Census (1920). The permanent Census Bureau 
publishes in addition to the annual Report of the Director, a large 
number of Bulletins (about 150 up to 191 9) and Special {Inter- 
censal) Reports. These are of six classes: 

A. Decennial: Manufactures (191 5); Agriculture (191 5); 
Defective, Dependent, and Delinquent Classes; Climate; Social 
Statistics of Cities; Wealth, Debt and Taxation (19 14); Religious 
Bodies; Transportation by Water; Express Companies; Savings 
Banks; Mortgage, Loan and Similar Institutions; Fishery 
Industry. 

B. Quinquennial: Street Railways; Electric Light and Power 
Stations; Telephone and Telegraph Business. 

C. Biennial: The Official Register of the U.S. (2 vols.), trans- 
ferred in 1907 from the Department of the Interior. 

D. Annual: Mortality Statistics; Birth Statistics; Financial' 
Statistics of Cities; Production and Distribution of Cotton; Forest 
Products; Quantity of Leaf Tobacco on Hand. 

E. Monthly: Cotton Production and Consumption. 

F. Occasional: Such as Mines and Quarries (1905); Women 
at Work (1907); Marriage and Divorce (2 vols. 1908-9). 

The Census Bureau has also published the' Philippine Census 
(4 vols. 1905); the Cuban Census (1908); and the Proceedings 
of the Conference of Governors on the Conservation of Natural 
Resources (1909). It has reprinted in part The First Census 
of 1790. In 1 914 it issued a Circular of Information concerning 
Census Publications. 

2. The Bureau of Foreign and Domestic Commerce pub- 
lishes in addition to the annual Report of the Chief a variety of 
reports under separate headings. 

The Editorial Division (formerly called the Division of Con- 
sular Reports) publishes information derived through the con- 
sular ofi&ces and transmitted to the Department of Commerce 
from the Department of State through the Bureau of Trade 
Relations. These reports were issued up to 1903 by the Bureau 
of Foreign Commerce of the State Department, from 1903- 
1905 by the Bureau of Statistics, and from 1906 to 191 2 by the 
Bureau of Manufactures. They now comprise: (a) a daily 



xxxiv Suggestions 

journal, known since 191 5 as Commerce Reports with Supple- 
ments consisting of the annual Consular Reports; (b) mono- 
graphs comprising the Special Agents Series (167 numbers to 
191 8), Special Consular Reports (80 numbers to 19 18), and 
Miscellaneous Series (66 numbers to 191 8); (c) Commercial 
Handbooks on foreign countries, India, 191 5; Central America, 
1916; China (in prep.); (d) Confidential Bulletins and circulars 
of varying kinds; {e) World Trade Directory. 

The Division of Foreign Tariffs publishes the Foreign Tariff Notes 
(18 to 1916) and the Foreign Tariff Series (38 numbers to 191 8). 

The Division of Statistics publishes the following reports: 
(a) a Monthly Summary of Commerce and Finance of the U. S., 
often containing monographs of special topics, among which 
may be mentioned those on Modern Tariff Systems (1904); 
Great Canals of the World (1901); Commercial Alaska, 1867- 
•1903 (1903); Sugar Production and Consumption of the World 
(1909); Principal Transportation Routes of the World (1909); 
Trade of the U. S. with other American countries (191 5); {b) the 
annual Report on the Commerce and Navigation of the U. S., in 
two volumes, also including much detailed information on 
internal commerce and general economic conditions; (c) the 
annual octavo Statistical Abstract of the U. S., a valuable con- 
densed compilation; (d) occasional reports such as Statistical 
Abstract of Foreign Countries (3 parts, 1909) and the Statistical 
Record of the Progress of the United States, 1800-1912 (1913); 
(e) the Monthly Bulletin of Sailing Dates. 

The Cost of Production Division pubhshes reports on the 
cost of production, such as the Pottery Industry (191 5); Women's 
Hosiery and Knit Goods 1^1916), etc. 

3. The Bureau of Fisheries publishes since 1871 Bulletins 
and Reports on the Fisheries. It discontinued in 1906 the 
volume known as the Annual Report of the Bureau, with ap- 
pendices, and has since then published the Annual Report of 
the Commissioner of Fisheries in the general annual volume 
of the Department of Commerce and Labor, the other special 
reports appearing as separate Bureau of Fisheries Documents 
under the head of Fish Culture, Aquatic Biology, Statistics of 
the Commercial Fisheries, and Special Subjects. 

4. The Bureau of Navigation publishes since 1884 the 



National Publications xxxv 

Annual Report of the Commissioner, a List of Merchant Vessels, 
and the monthly Radio Service Bulletin. 

5. The Coast and Geodetic Survey publishes since 18 16 
the Annual Report of the Superintendent, as well as numerous 
charts and maps. 

6. The Bureau or Standards wg-s set off in 1901 from the 
Coast and Geodetic Survey, and publishes, in addition to the 
Annual Report of the Director, many circulars and bulletins 
relating to weights, measures, photometry, thermometry, 
pyrometry, polarimetry, radiometry, and the like. 

7. The Bureau of Light-Houses publishes since 1859 a 
bulky annual report and many Buoy and Light Lists. 

8. The Steamboat-Inspection Service publishes since 1852 
the Annual Report of the Supervising Inspector -General. 

All of the above Bureaus publish their reports in the Annual 
Report of the Secretary of Commerce, which appear as separate vol- 
umes with additional data in the case of The Bureau of Navigation, 
The Bureau of Light-Houses and The Steamboat Inspection Service. 

The Department of Labor, set off from the Department of 
Commerce and Labor in 191 3, publishes annually the Report of 
the Secretary. The other publications are issued by the separate 
bureaus or divisions as follows: 

(i) The Bureau of Labor Statistics, formerly known as 
the Bureau of Labor, publishes annually the Report of the Com- 
missioner of Labor Statistics. From 1886 to 191 1 it also pub- 
lished an annual report; and from 1889 to 1906 it published special 
reports. The annual reports are as follows: (i) Industrial 
Depressions (1886); (2) Convict Labor (1887); (3) Strikes and 
Lockouts (1888); (4) Workingmen in Large Cities (1889); (5) 
Railroad Labor (1890); (6) Cost of Production, Iron, Steel, Coal, 
etc. (1891); (7) Cost of Production, Textiles and Glass (2 vols., 
1892); (8) Industrial Education (1893); (9) Building and Loan 
Associations (1894); (10) Strikes and Lockouts (2 vols., 1894); 
(11) Wages of Men, Women and Children (1897); (12) The Liquor 
Problem (1898); (13) Hand and Machine Labor (2 vols., 1899); 
(14) Water, Gas and Electric Light Plants (1900); (15) Wages 
in Commercial Countries (2 vols., 1900); (16) Strikes and Lock- 
outs, 1881 to igoo (1901); (17) Trade and Technical Education 



xxxvi Suggestions 

(1902) ; (18) Cost of Living and Retail Prices of FooU, igoj (1904) ; 
(19) Wages and Hours of Labor (1905); (20) Convict Labor 
(1906); (21) Strikes and Lockouts, igoi to igoj (1907); (22) 
Labor Laws (1908); (23) Workingmen^s Insurance in the U. S. 
(1909); (24) Workingmen's Insurance and Compensation Systems 
in Europe (2 vols., 1911); (25) Industrial Education (191 1). 

The special reports are as follows: (i) Marriage and Divorce 
(1889); (2) Labor Laws of some States (1892; 2d ed., 1896); 
(3) Analysis and Index of all Reports issued by Bureaus of 
Labor Statistics in the United States (1893); (4) Compulsory 
Insurance in Germany (1893); (5) The Gothenburg System of 
Liquor Traffic (1893); (6) The Phosphate Industry of the United 
States (1892); (7) The Slums of Baltimore, Chicago, New York 
and Philadelphia (1894); (8) The Housing of the Working 
People (1895); (9) The Italians in Chicago (1897); (10) Labor 
Laws of the United States (1904); (11) Restriction of Output 
(1905) ; (12) Coal Mine Labor in Europe (1906). The Bureau has 
also published three Reports on the Laboring Classes in Hawaii 
(for 1901, 1902, and 1905); on Labor Disturbances in Colorado 
(1905); and on Hours of Work of Government Laborers (1905). 
Since 1905 special reports have been published as Senate docu- 
ments: 60th Cong., 2d Sess., Telegraph Cos. (no. 725); 6ist 
Cong., 2d Sess., Pension Funds (no. 427); Bethlehem Steel Strike 
(no. 521); Telephone Cos. (no. 380); Women and Child Wage 
Earners (no. 645); Fourth Report on Hawaii (no. 866); 62d 
Cong., 2d Sess., Wages and Hours of Labor (no. 301); 63d 
Cong., 2d Sess., Federal and State Laws relating to Convict 
Labor (no. 494). 

The Bureau has published a bi-monthly Bulletin of the Bureau 
of Labor, with valuable original articles, a survey of foreign 
statistical labor publications, the decisions of the courts affecting 
labor, and all new labor laws of the separate states. 

Since 191 2 the Bulletins have been published at irregular 
intervals in ten series: (i) Wholesale Prices; (2) Retail Prices 
and Cost of Living; '(3) Wages and Hours of Labor; (4) Women 
in Industry; (5) Workingmen's Insurance and Compensation; 
(6) Industrial Accidents and Hygiene; (7) Conciliation and Ar- 
bitration; (8) Labor Laws of the United States; (9) Foreign Labor 



National Publications xxxvii 

Laws; (lo) Miscellaneous Series. These bulletins are numbered 
consecutively, both in each series and as a whole, beginning with 
no. loi. Since 191 5 the Bureau also publishes a Monthly Review. 

(2) The Bureau of Immigration publishes since 1892 the 
annual Report of the Commissioner General of Immigration. 
Within this bureau is the Division of Information which pub- 
lished the annual Report of the Chief and also occasional Bulletins. 

(3) The Bureau of Naturalization, set off in 191 2 from the 
Bureau of Immigration and Naturalization, publishes annually 
the Report of the Commissioner of Naturalization. 

(4) The Children's Bureau, established in 191 2, publishes 
annually the Report of the Chief and Bulletins in separate series 
dealing respectively with The Care of Children, Infant Mortality, 
The Federal Status of Children, Child Labor Laws, etc. 

The Treasury Department issues the Annual Report of 
the Secretary of the Treasury, which contains a survey of the 
Finances, and includes the Reports of the Treasurer, the Register 
of the Treasury, the Director of the Bureau of Engraving and 
Printing, the Surgeon General, the Supervising Architect, the 
Superintendent of the Life-Saving Service, the Director of the 
Mint, the Comptroller of the Currency, and the Commissioner 
of Internal Revenue. These reports are also published separately, 
the last three in enlarged form and with voluminous tables. 

Among the numerous additional publications are the follow- 
ing: Division of Printing: Treasury Decisions (weekly and 
annual); Division of Bookkeeping: Estimates of Appro- 
priations (annual); Division of Customs: Customs Deci- 
sions (annual), Conference of Local Appraisers (annual) and 
Appeals Pending (quarterly); Comptroller of the Cur- 
rency: Abstracts of Reports of National Banks and Digest of 
Decisions; Bureau of the Mint: Report upon Production 
of Precious Metals (annual) ; Commissioner of Internal Rev- 
enue: The Gangers^ Manual and Digest of Decisioiis; Comp- 
troller OF THE Treasury: Decisions (quarterly and annual); 
Division of Loans and Currency: Circulation Statement 
(monthly), Value of Foreign Coins {qua,Tter\y); Public Health 
Service: Public Health Reports (weekly and annual), Public 
Health Bulletins. Numerous monthly, weekly and daily State- 



xxxviii Suggestions 

went Sheets are also issued on the finances. A useful compila- 
tion is the Laws of the United States concerning Money, Banking 
and Loans. By Huntington and Mawhinney. Washington, 
191 1 (with reissues from time to time). The Federal Farm 
Loan Bureau, created in 1916, issues numerous reports and 
circulars through the Federal Farm Loan Board. 

The Department of Agriculture publishes the annual Re- 
port of the Secretary, the Yearbook of the Department, and many 
documents issued by the various bureaus. Of these the most 
important are the Bureau of Animal History; the Bureau of 
Plant Industry, with separate divisions publishing Vegetable 
Pathology and Physiology Bulletins, Botany Bulletins, Agrostology 
Bulletins, and Pomology Bulletins; the Forest Service; the 
Bureau of Chemistry; the Bureau of Soils; the Bureau 
OF Entomology; the Bureau of Biological Survey; the 
Bureau of Crop Estimates; the Bureau of Markets, which 
publishes daily, weekly and monthly Market Reports, daily and 
weekly Marketgrams, and a weekly Market Reporter) the States 
Relations Service (prior to 191 6 termed the Office of 
Experiment Stations) , which publishes the monthly Experiment 
Station Record and Agricultural College Bulletins; the Office of 
Farm Management; the Office of Public Roads and Rural 
Engineering; and the Weather Bureau, which publishes a 
daily Map, a weekly National Weather and Crop Bulletin, and a 
monthly Weather Review. Several of the above Bureaus publish 
separate annual reports. Numerous reports are issued for the 
Bureau of Statistics by: {a) the Division of Domestic 
Crop Reports (which publishes the monthly Crop Report), (b) 
the Division of Production and Distribution which up to 
1903 was known as the Division of Foreign Markets and (c) 
the Editorial Division, which publishes statistics on rural 
economics. These reports take the form of Bulletins, Circulars, 
and Reprints from the Yearbook. The Department also publishes 
the Proceedings of the Annual Meeting of the American Associa- 
tion of Farmers^ Institute Workers, and many Special Reports, 
some of the most important of recent years being the Geography 
of the World's Agriculture by Finch and Baker (191 7), and 
Co-operative Credit Associations Abroad. In 191 2 there were issued 



National Publications xxxix 

under the heads of Reports, Bulletins, Circulars, and Separates, 
2 no pubUcations in over thirty-four million copies, about one- 
third of them being Farmers^ Bulletins, The Division of Publica- 
tions publishes a Monthly List of Fublications, which forms a con- 
venient bibliography of the Department issues. Bulletin no. 6 
contains a bibliography of the Department from 1840 to 1901. 
Circular no. 150(1921) contains a list of all the publications of the 
Bureau of Crop Estimates, 1863-1920. An index to the Farmers' 
Bulletins, nos. i-iooo, by C. H. Greatham, appeared in 1920. 

Since 19 16 the Series of Publications have been reduced to 
six: (i) Departmental Bulletins, containing the popular results of 
investigation; (2) Periodical Publications, including the Journal 
of Agricultural Research, Experiment Station Record, Monthly Crop 
Report, Market Reports and Marketgrams; and Weekly News 
Letter, (3) Farmers^ Bulletins; (4) Administrative Circulars; 
(5) Separates and Unnumbered Pamphlets, including reprints; 
and (6) Annual Reports and other congressional publications, 
including the Year Book and the Soil Surveys, 

The Department of the Interior publishes annually the 
Report of the Secretary, containing, in addition to condensed 
reports of the Bureaus, reports of the Territories, the Ter- 
ritorial Possessions, the National Parks and the Elee- 
mosynary Institutions. The Bureaus which issue separate 
annual reports and other publications are the General Land 
Office (with Decisions in Land Cases), the Indian Office, 
the Bureau of Pensions, the Patent Office (with the Patent 
Office Gazette, Decisions in Patent Cases and Indexes to Patents), 
the Bureau of Education (with many Separates, Circulars 
and Bulletins, Bulletin no. 385 containing a bibliography from 
1867 to 1907), the Bureau of Mines (with Bulletins, Technical 
Papers and Miners' Circulars), the Geological Survey (with 
Bulletins, Monographs, Professional Papers and a separate 
report in two volumes on the Mineral Resources of the United 
States) and the Reclamation Service (in several volumes). 

The Interstate Commerce Commission publishes since 
1887 annually the Report of the Commission and the Report on 
the Statistics of Railways in the United States. The Bureau of 



xl Suggestions 

Statistics and Accounts publishes since 1909 the Monthly 
(and Annual) Bulletin of Revenu es and Expenses of Steam Roads, 
since 191 2 the Accounting Bulletins, since 191 1 the annual Report 
on the Statistics of Express Companies, since 19 14 the Reports on 
Valuation and since 1920 the Reports of the Railway Labor 
Board. The cases themselves are pubhshed as Decisions of the 
Interstate Commerce Commission, The Commission also issues 
annually the Proceedings of the Annual Convention of the National 
Association of Railway Commissioners. It published in 1903 
a five-volume work, entitled Railways in the United States in 
igo2. Since 1908 it issues Special Reports, of which the first 
was Intercorporate Relations of Railways. 

The Tariff Board, abolished in 191 2, published reports on 
Pulp and News-Print Paper (191 1), on Wool (4 vols., 191 2), and 
on Cotton Manufactures (2 vols., 1912). 

The Tariff Commission, created in 191 7, publishes an annual 
Report; a Tariff Information Series (22 nos. to 1 921); a Miscellaneom 
Series (8 nos. to 1921); and a series of reports for the Ways and 
Means Committee. 

The Post-Oflace Department pubhshes an annual Report. 

The War Department deals with economic topics through the 
Bureau of Insular Affairs. The chief of the Bureau issues 
his Annual Report (including the Report of the Philippine Com- 
mission in several volumes and the Report of the Governor of 
Porto Rico) and a great variety of other documents. The De- 
partment also issues the annual Report of the Governor of the 
Panama Canal, and the Panama Record. 

The Smithsonian Institute publishes many annual reports, 
of which the one of chief interest to economists is the Report of 
the Bureau of Ethnology in one or more simiptuous quarto volumes. 

The Federal Reserve Board, created in 1914, pubhshes an 
annual Report and a valuable monthly Bulletin. 

The Federal Trade Commission, created in 1914, publishes 
an annual Report. It has succeeded the former Bureau of Cor- 
porations which has published special reports on the Beef In- 
dustry (1905); Transportation of Petroleum (1906); The Petroleum 
Industry (2 vols., 1907); Cotton Exchanges (3 vols., 1908-9); 



Congressional Documents xli 

The Tobacco Industry (3 vols., 1909-15); Taxation oj Corporations 
(6 vols., 1909-1915); Special Report on Taxation (1914); Trans- 
portation by Water in the U. S. (4 vols., 1909-12); The Steel In- 
dustry (3 vols., 1913-14); Waaler Power Development in the U. S. 
(191 2); The International Harvester Co. (1913). The Trade 
Commission has published reports on The Lumber Industry 
(191 5); Pipe Line Transportation (1916); Trust Laws and Un- 
fair Competition (1916); Co-operation in American Export Trade 
(191 6); Beet Sugar (191 7); Anthracite and Bituminous Coal 
(191 7); Book and News-print Paper Industry (191 7); Fertilizer 
Industry (191 7); Meat Packing Industry (1919)' Coal (7 vols., 
1918-1921). 

The International Bureau of the American Republics, more 
recently known as the Pan-American Union, publishes since 1891 
an annual Report of the Director, since 1893 a monthly Bulletin 
and many Reports. 

The Board of Mediation and Conciliation created in 1913 
publishes an annual Report. 

The U. S. Employees Compensation Commission created in 
1916 publishes an annual Report. 

The U. S. Shipping Board created in 191 7 publishes an annual 
Report. 

The Federal Board for Vocational Education created in 191 7 
publishes an annual Report. 

C. Congressional Documents 
Among the numberless Congressional Documents of recent 
years may be mentioned as of special interest to the students 
of economics: 

Senate Report on the Strike of Textile Workers in Lawrence, Mass., in igi2. 
(1912.) 

House Report on the Miners^ Strike in the Bituminous Coal Field in 
Westmoreland Co., Pa., in igio-igii. (191 2.) 

(House) Committee on Ways and Means, Tariff Hearings. (9 vols., 
1 908- 1 909.) 

Tariff Schedules. Hearings before the Senate Sub-Committee on Finance. 
(1913-) 



xlii Suggestions 

Railroad Securities Commission Report. (191 1.) 

The Immigration Commission, Report on Immigration. (42 vols., 
1910-1912.) 

Public Lands Commission, Preliminary and Second Reports. (1905.) 

Inland Waterways Commission, Preliminary Report. (1909.) 

Commission on Country Life, Preliminary Report. (1909.) This, 
as well as the two preceding Commissions, was created by the Execu- 
tive, but discontinued by Congress. 

National Monetary Commission, Reports on Banking and Currency, 
at Home and Abroad. (23 volumes, 1910-1912.) 

(House) Stanley Committee Report on the United States Steel Corporation. 
(1911-1913.) 

(Senate) Pujo Committee on the Money Trust Investigation. (1913.) 

(Senate) Investigation relative to Wages and Prices of Commodities. 
(4 vols., 191 1.) 

National Waterways Commission, Report. (Several vols., 1909-1912.) ,■ 

(Senate) Report on Condition of Woman and Child Wage Earners in the 
United States. (19 vols., 1910-1912.) 

President's Commission on Efficiency and Economy. (6 vols., 191 2- 
1913-) 

Senate Committee on the Merchant Marine and Fisheries. Investiga- 
tion of Shipping Combinations. (4 vols., 1913-1914.) 

(Senate) Committee, Report on Agricultural Co-operation and on Rural 
Credit. (2 vols., 1913.) 

Senate Committee on Interstate Commerce. Report on Government 
Control and Operation of Railroads. (1918), and Report on Extension 
of Tenure of Government Control of Railroads. (3 vols., 1919.) 

Senate Committee on Commerce. Report on U . S. Shipping Board Emer- 
gency Fleet Corporation. (8 parts, 1919.) 

(Senate) Select Committee on Reconstruction and Production. (4 vols., 1920.) 

The most valuable report of recent years is the Report of the 
Industrial Commission (19 vols., 1900-19 12). The list of volumes 



Congressional Documents xliii 

is as follows: I. Trusts and Industrial Combinations; II. Trust 
and Corporation Laws; III. Prison Labor; IV. Transportation; 
V. Labor Legislation; VI. Distribution of Farm Products; VII. 
Capital and Labor in Manufactures and in General Business; VIII. 
Chicago Labor Disputes; IX. Transportation; X. Agriculture 
and Agricultural Labor; XI. Agriculture and Taxation; XII. 
Capital and Labor in the Mining Industries; XIII. Trusts and 
Industrial Combinations; XIV. Capital and Labor in Manufac- 
tures and General Business; XV. Immigration and Education; 
XVI. Foreign Labor Legislation; XVII. Labor Organization, 
Labor Disputes and Arbitrations; XVIII. Industrial Combina- 
tions in Europe; XIX. Final Report. For the wealth of material 
and the ability with which the results are presented, this huge 
report is unique in the annals of the government publications. 
The final volume gives an admirable survey of the economic 
condition of the United States. 

The U. S. Commission on Industrial Relations created in 19 14 
published its Report with Testimony (11 vols.) and its Final Re- 
port in 191 5 as well as a separate Report on the Colorado Strike. 

The American governments are exceedingly liberal in the 
distribution of documents. All local and state reports can 
usually be had for the asking; but as the supply is Hmited, it 
is well not to delay. As to the documents of the national gov- 
ernment, the House and Senate publications can be obtained 
by application to one's Representative or Senator; the depart- 
mental publications by application to the respective depart- 
ments. There is now also a Superintendent of Documents, who 
is authorized by law to sell surplus documents in his charge at 
cost of printing from the plates. He publishes a monthly Price 
List of United States Public Documents for Sale. In a few cases, 
however, documents are sold by other parties. Thus the Con- 
gressional Record is sold by the Chief Clerk of the Government 
Printing Office; the Bulletins and Handbooks of the American 
Republics Bureau are sold by the Director of the Bureau; the 
Official Gazette of the Philippine Government, by the Editor in 
Manila; etc., etc. Several private firms in Washington and 
elsewhere make a business of supplying government documents. 



xliv Suggestions 



D. Indexes to Government Periodicals 

PoORE, Ben Perley. A Descriptive Catalog of the United States Govern- 
ment Publications, 1^^4-1881. (1885.) — Not entirely satisfactory. 

Ames J. G. Comprehensive Index of Publications of the United States 
Government, i88i-i8qj. (New ed., 1905.) 

LuNT, E. C, Key to the Publications of the United States Census, 1790- 
1887 (in American Statistical Association Publications, new Series, 
I, 1888). — A carefully classified guide. 

Scott, G.W., and Beaman, M. C. Index Analysis of the Federal Statutes, 
together with a table of Repeals and Amendments. (2 vols., 1908.) 

SwANTON, W. J. Guide to U. S. Government Publications. Bureau of 
Education Bulletin, 19 18, no. 2. 

The Monthly Catalogue of United States Public Documents, 
issued by the Superintendent of Documents, contains an annual 
index. For lists and indexes of state publications, see p. xxxi. 

E. British Official Publications 

In Great Britain the official publications and reports, known 
as Blue Books, are in some respects more voluminous than in 
the United States. The chief periodical report is the decennial 
Census. That of igoi appeared in 7 volumes; the Census of igii 
in 13 volumes. Most of the annual ofhcial reports fall under 
the heads of Finance, Trade and Labor. 

Finance, Among these, each in a separate volume or volumes, 
are the Finance Accounts; Financial Estimates; Returns showing Revenue 
and Expenditures; National Debt Account; National Debt during Sixty 
Years; Consolidated Fund Abstract Accounts; Commissioners of Inland , 
Revenue; Income Tax Assessments; Local Taxation Returns, Mint 
Report; Rateable Property Returns; Savings Bank Returns; Commis- 
sioners of H. M.'s Customs. 

Trade. These reports, issued by the Statistical Department of 
the Board of Trade, include the Statistical Abstracts for the British 
Empire, for the British Colonies and for the United Kingdom; Reports 
on the Trade of the United Kingdom with Foreign Countries and British 
Possessions; Statistical Tables showing Progress of British Trade and 



British Documents xlv 

Prodtwiions; Merchant Shipping Returns; Canals and Navigation 
Returns; Navigation and Shipping Statements; Railway Accidents; 
Emigration and Immigration. Also monthly Trade and Navigation 
Accounts and a Board of Trade Journal. The Statistical Department of 
the Board of Customs issues annually the Report of the Commissioner 
of Customs, Colonial Import Duties and Foreign Import Duties. 

Labor. These reports, issued by the Labor Department of the 
Board of Trade, include Abstract of Labor Statistics; Abstract of Foreign 
Labor Statistics; Changes in Wages and Hours of Labor, Conciliation 
{Trade Disputes) Act; Strikes and Lockouts; Trade Unions; Directory 
of Industrial Associations; Report of Chief Inspector of Factories and Work- 
shops; Report of the Chief Registrar of Friendly Societies; Co-operative Con- 
tracts; Industrial and Provident Societies; Minimum Wage Boards; National 
Insurance Commissioners; also a monthly Board of Trade Labor Gazette. 

Other annual reports are: 

Agricultural Returns; Department of Agriculture and Technical In- 
struction in Ireland; Registrar General; Irish Land Commission; Re- 
ports on Mines and Quarries; Inspector of Sea and Salmon Fisheries; 
Geological Survey; Returns relating to Poor Rates and Pauperism; Rail- 
way and Canal Commission; Street and Road Tramways; Trade and 
Finance of Foreign Countries; Diplomatic and Consular Reports; Post- 
master-General. There is also a Statistical Abstract for British India. 

Among the recent special Reports of departments and Parlia- 
mentary committees and commissions the most important are: 

Royal Commission on Agriculture (4 vols., 1896), and Reports of 
Assistant Commissioners (20 vols., 1896); The Sweating System (8 vols., 
1889); Labor (27 vols., 1894); Local Taxation (9 vols., 1902); Financial 
Relations between Great Britain and Ireland (2 vols., 1896); Standard 
Piece and Time Rates (1893 and 1900); Wholesale and Retail Prices 
(1903); Employment of Women (1894, 1898, 1899); The Unemployed 
(1893 and 1904); Tariff Commission (8 vols., 1904-1910); Eight Hours 
Day in the Coal Mines (3 vols., 1906); Income Tax (1906); Poor Laws 
(3 vols., 1909); Cost of Living (5 vols., 1907-1912); Local Taxation 
(2 vols., 1912-1914); Natural Resources, Trade and Legislation of Certain 
Portions of H. M. Dominions (18 vols., 1913-1917); Administration of 
National Health Insurance (191 7); and the numerous special reports 
on War Finance and War Legislation and Currency (i 914-19 19). 

The most important reports and papers are summarized and 
criticised in an admirable quarterly review in each number of 



xlvi Suggestions 

the Economic Review. Messrs. P. S. King & Son, of London, 
publish a convenient Monthly List of Parliamentary Papers 
issued in the preceding month. There is also a General Cata- 
logue of the Principal Parliamentary Reports and Papers pub- 
lished during the Nineteenth Century (1801 to iQOo), with prices, 
and in many cases with an analysis of contents. 

For Australasia the best conspectus of the economic situation 
may be found in the annual Official Year Book of Australia 
(no. 13, 1920) and the New Zealand Official Year Book (twenty- 
ninth year, 1920). The separate states also publish good Year 
Books or annual Statistical Registers. 

For Canada an excellent summary will be found in the annual 
Canada Year Book issued by the Census and Statistics Office 
of Agriculture, and covering the entire economic field. 

For South Africa consult tne annual Official Year Book of the 
Union of South Africa. 



VI. Semi-Official Publications 

The publications of the American government are supple- 
mented by a great mass of documents, periodicals and reports, 
issued by private and quasi-public associations. Local trade 
statistics are found in the Reports of the Chambers of Commerce 
of the principal cities. In New York City the Chamber of 
Commerce frequently publishes valuable reports on economic 
topics of state and national significance. Almost every im- 
portant branch of business has its own Trade Journal, many 
of which are edited with great ability. 

The Bulletin of the National Association of Wool Manufac- 
turers is published quarterly since 1864. The Annual Reports 
of the Iron and Steel Association also deserve mention. In some 
cases like the Bankers^ Association, the Chamber of Commerce 
of the U. S., the National Foreign Trade Council, and the Manu- 
facturers' Association annual conventions are held and extended 
reports issued. The publications of the Labor Organizations 
and Trades Unions are voluminous. The National Federation 
of Labor issues a weekly Bulletin and a Report of the Annual 
Convention. 

The annual reports of some of the great Railway Systems, 



Bibliographies xlvii 

Insurance Companies and Industrial Corporations can generally 
be secured without difficulty, and afford interesting side lights 
on economic development. Associations like the Free Trade 
League; the Asiatic Association; the Irrigation Congress; the 
River and Harbor Congress; the Farmers' Alliance; the National 
Child Labor Committee; the Association for Labor Legislation; 
the National Live Stock Association; the National Good Roads 
Association; the Patrons of Husbandry; the National Dairy 
Association; the Stock Breeders' Association; the Philadelphia 
Commercial Museum; the National Municipal League; the 
Water-Power Associations; the National Tax Association; the 
Association of Life Insurance Presidents, and many others of 
more or less permanence,, issue fugitive, or periodical reports. 
Among the most important of such semi-official publications 
are those of the Merchants' Association, of the Bureau of Munici- 
pal Research, of the Russell Sage Foundation, of the National 
Civic Federation, — all of New York. Many important social 
questions are treated in the annual Proceedings of the National 
Conference of Charities and Corrections and in the Reports of 
the National Industrial Conference Board. More recently 
several New York Banks have published regular reports such as 
the monthly Bulletin and the Foreign Commerce Series of the 
National City Bank; the Commerce Monthly of the National 
Bank of Commerce; the Monthly Review of the New York Federal 
Reserve Bank; and the Chase Economic Bulletin of the Chase 
National Bank. 

A valuable compendium is The American Year Book (New 
York, 1911-1920). 

VII. Bibliographies and Finding Lists 

A series of bibliographies, prepared by the chief bibliographer 
of the Library of Congress (A. P. C. Griffin, since 1909 H. H. B. 
Meyer), has been published since 1902 by the national govern- 
ment. The dates and subjects are as follows: Reciprocity, 
(1902); Industrial Arbitration^ Government Ownership of Rail- 
roads, Labor, Colonization, 2d ed., (1903); Chinese Immigra- 
tion, Banks, Budget, The Far East, Federal Control of Com- 



xlviii Suggestions 

merce, 2d ed., (1904); Foreign Railroads, Philippines, (1905); 
Child Labor, Municipal Ownership, Negro Questions, 2d ed., 
Employers^ Liability, British Tariff Movement, 2d ed., Foreign 
Tariffs, Government Regulation of Insurance, Mercantile Ma- 
rine Subsidies, 3d ed., (1906); Federal Control of Commerce, 
Railroads, 2d ed.. Immigration, 3d ed., Income Tax, Iron and 
Steel, Reciprocity with Canada, Trusts, 3d ed., (1907); Currency 
and Banking, Deep Waterways, Eight Hour Day, First and 
Second United States Banks, Workingmen^s Insurance, Labor, 
2d ed., Postal Savings Banks, (1908); Valuation and Capitali- 
zation of Railroads, (1909); Cost of Living, Reciprocity, Sugar, 
Inland Waterways of Europe, (1910); Boycotts and Injunctions, 
Employers^ Liability, Mercantile Marine Subsidies (additional), 
Parcels Post, Reciprocity with Canada (additional). Taxation of 
Incomes (additional). Wool, (1911); Conservation, Cost of Living 
and Prices, (additional) (191 2); Monetary Question, Federal 
Control of Commerce and Corporations, (1913); Water Rights, 
Industrial Arbitration, new ed.. Child Labor, new ed., (1914); 
Prison Labor, (1915); Embargoes, (191 7); European War Litera- 
ture, (19 1 8); Shipping, Reconstruction, Dyestuffs (19 19); Income 
Tax (1921). 

Since 191 1 the Librarian of Congress prints additional lists 
in the Series known as Special Libraries in co-operation with 
state libraries and state legislative reference departments. Since 
1 91 8 the Library issues numerous typewritten lists, of which 
fully 60% deal with economic and social questions. 

Other good bibliographies on special subjects are: 

The Social Workers' Guide to Social Publications of Representative Social 
Agencies. By E. M. Rushmore. Published for the Russell Sage 
Foundation. (New York, 1921.) 

Civic Bibliography for Greater New York. Edited by James B. Reynolds 
for the New York Research Council (191 1.) 

Labor Bibliography. Published by the Mass Bureau of Labor Statistics, 

(1913-) 
Selected Bibliographies on Labor Subjects. Published by the American 

Association of Labor Legislation. (1911-1916.) 
List of Publications pertaining to Government Ownership of Railways. 

Publishedby the Bureau of Railway Economics. Washington, 1914. 



Bibliographies xlix 

The Boston Public Library has published: 

Economics: Selected Works in the English Language (1904.) — Compiled 
by Benj. Rand. 

i 
The New York Public Library publishes since 191 5 the weekly 

Municipal Reference Library Notes, ed. by C. C. Williamson, 

containing annotated bibliographies on economic topics. 

The London School of Economics and Political Science also 
issues occasional bibliographies on selected topics. 

The three most complete bibliographies on socio-economic 
topics are in German: 

Bernstein, Edouard. Bihlio graphic des Sozialismus und der Sozial- 
wissenschaften in each number of Dokumente des Sozialismus. (1901- 
1905.) — Annotated and valuable. 

Stammhammer, Josef. Bihliographie des Socialismus und Commu- 
nismus. (3 vols., 1893-1909.) 

Stammhammer, Josef. Bihliographie der Social-Politik. (1896.) 

The only general bibliography in English is the short work of 
BowKER, R. R., and Iles, George S., The Readers' Guide in 
Economics, Social and Political Science. (1891.) 

A comprehensive annual bibliography is published by the 
International Institute of Bibliography under the title Bihlio- 
graphia Economica Universalis. It now appears as a quarterly 
appendix to the Revue Economique Lnternationale. 

The most convenient English bibliography of current works 
was until recently to be found in The Quarterly Journal of 
Economics. This was discontinued in 1908 and replaced by 
the excellent bibliography in the Economic Bulletin of the 
American Economic Association, continued since 191 1 in the 
American Economic Review. The best foreign bibliography is 
the Uebersicht Uber die neuesten Publikationen in Conrad's 
Jahrbilcher filr N ationalokonomie und Statistik. A combina- 
tion of bibliography and comment is found in the Kritische 
Blatter fUr die gesamten Sozialwissenschaften (monthly, Dresden, 
1 905-1 9 1 2). Edited by H. Beck. The periodical was composed 
of critical reviews by an international staff, each number serv- 
ing as an introduction to a Bibilographie der Sozialwissen- 
schaften which since 1906 was published for the International 



1 Suggestions 

Institute of Social Bibliography in Berlin. It was printed in 
several languages, the English edition having been distributed 
for a brief time as a supplement to the Journal of Political 
Economy. 



VIII. List of Books to -which Abbreviated References are 
made in the Bibliographies at the Heads of Chapters 

Ashley, W. J. An Introduction to English Economic History aftd Theory. 
(2 vols., London, 1888- 1893.) 

Ashley, W. J. Surveys, Historic and Economic. (London, 1900.) 

Bagehot, Walter. Economic Studies. (London, 1880.) 

BEVERffiGE, W. H. Unemployment. A Problem of Industry. (Lon- 
don, 1909.) 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. (Trans, 
by Smart, London, 189 1.) 

BOWLEY, Arthur L. Elements of Statistics. (London, 1901, 4th ed., 
1920.) 

BtJCHER, Carl. Industrial Evolution. (Trans, from the 3d German 
edition by S. Morley Wickett, New York, 1901.) 

Cairnes, J. E. The Character and Logical Method of Political Economy. 
(London, 1857; 2d ed., 1875.) 

Cairnes, J. E. Some Leading Principles of Political Economy, newly 
Expounded. (London, 1874.) 

Cannan, Edwin. A History of the Theories of Production and Dis- 
tribution in English Political Economy from 1776 to 1848. (London, 
1893; 3d ed., 1909.) 

Cannan, Edwin. Wealth. A Brief Explanation of the Causes of Economic 
Welfare. (London, 19 14.) 

Carver, Thomas Nixon. The Distribution of Wealth. (New York, 
1904) 

Carver, Thomas Nixon. Principles of Political Economy. (New York, 
1919.) 

Clark, John Bates. The Distribution of Wealth. (New York, 1899.) 

Clark, John Bates. Essentials of Economic Theory. (New York, 
1907.) 



Select BookvS li 

CoMAN, Katharine. The Industrial History of the United States. (New 
York, 1905; new ed., 191 1.) 

Commons, J. R., and Associates. History of Labour in the United States. 

(2 vols., New York, 1918.) 

Cunningham, W. An Essay on Western Civilization in its Economic 
Aspects. Ancient Times. (2d ed., London, 1911.) Mediosval and 
Modern Times. (2d ed., London, 1910.) 

Cunningham, W. The Growth of English Industry and Commerce. 
Early and Middle Ages. (5th ed., London, 1910.) Modern Times. 
(5th ed., 2 vols., London, 191 2.) 

Davenport, Herbert Joseph. Value and Distribution. (Chicago, 
1907.) 

Davenport, Herbert Joseph. The Economics of Enterprise. (New 
York, 1913-) 

Dewey, Davis R. Financial History of the United States. (Am. Citizen 
Series, New York, 1903, 7th ed., 1920.) 

Ely, Richard T. Studies in the Evolution of Industrial Society. (New 
York, 1903.) 

Ely, Richard T. Property and Contract in their Relations to the Distri- 
bution of Wealth. (New York, 1914.) 

Fetter, Frank A. The Principles of Economics. (New York, 1904, 
3d ed., 1913.) Economic Principles (1915); Modern Economic 
Problems (19 16). 

Fisher, Irving. The Nature of Capital and Income. (New York, 
1906.) 

Fisher, Irving. The Rate of Interest. (New York, 1907.) 

Fisher, Irving. The Purchasing Power of Money. (New York, 191 1.) 

Flux, A. W. Economic Principles, an Introductory Study. (London, 
1904.) 

GiFFEN, Robert. Economic Inquiries aiul Studies. (London, 1904.) 

Hadley, Arthur Twining. Economics. An Account of the Rela- 
tions between Private Property and Public Welfare. (New York 
1896.) 

Hearn, William Edward. Philology; or^ the Theory of the Efforts 
to Satisfy Human Wants. (London, 1864.) 

Hobson, John A. The Economics of Distribution. (New York, 1900.) 



lii Suggestions 

HoBSON, John A. The Evolution of Modern Capitalism. (London, 
1894,4th ed., 1917.) 

HoBSON, John A. Work and Wealth. A Human Valuation. (London, 
1914.) 

Jevons, W. Stanley. Investigations in Currency and Finance. (Lon- 
don, 1884.) 

Jevons, W. Stanley. Methods of Social Reform. (London, 1883.) 

Jevons, W. Stanley. Money and the Mechanism of Exchange. (Lon- 
don, 1879.) 

Jevons, W. Stanley. The Principles of Economics. (London, 1905.) 

Jevons, W. Stanley. The Theory of Political Economy. (London, 
1871; 4th ed., 1911.) 

Johnson, Alvin, S. Rent in Modern Economic Theory. In American 
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Kelley, Florence. Modern Industry in Relation to the Family, Health, 
Education, Morality. (New York, 19 14.) 

Keynes, J. The Scope and Method of Political Economy. (London, 
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Maine, Henry Sumner. Ancient Law. (London, 1861; 8th ed., 
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Marshall, Alfred. Principles of Economics. (Vol. I, London, 1890; 
8th ed., 1920.) 

Marshall, Alfred. Industry and Trade. (London, 1920.) 

Mayo-Smith, Richmond. Science of Statistics. (New York, 2 parts, 
1895-1899.) 

Mitchell, Wesley Clair. A History of the Greenbacks. (Chicago, 
1903-) 

Mitchell, Wesley Clair. Gold, Prices and Wages under the Green- 
back Standard. (Berkeley, 1908.) 

Mitchell, Wesley Clair. Business Cycles. (Berkeley, 1913.) 

Mill, John Stuart. Principles of Political Economy, with some of 
their Applications to Social Philosophy. (2 vols., London, 1848; 
5th ed., 1880.) 



Select Books liii 

Moore, Henry Ludwell. Laws of Wages. (New York, 191 1.) 

Nicholson, J. Shield. Principles oj Political Economy. (3 vols., 
London, 1893-1901.) 

Nicholson, J. Shield. The Effects of Machinery on Wages. (New ed,, 
London, 1892.) 

Pantaleoni, Maffeo. Pure Economics. (Trans, by Bruce, London, 
1898.) 

Patten, Simon N. The Consumption of Wealth. (Philadelphia, 1889.) 

Patten, Simon N. The Development of English Thought; A Study in 
the Economic Interpretation of History. .(New York, 1899.) 

Patten, Simon N. The Theory of Dynamic Economics. (Philadelphia, 
1892.) 

Peerson, N. G. Principle of Economics. (Trans, by A. A. Wotzel. 
London, Vol. I, 1902; Vol. II., 19 12.) 

PiGou, A. C. Wealth and Welfare. (London, 191 2.) 

PiGOU, A. C. Economics of Welfare. (London, 192 1.) 

RiCARDO, David. Principles of Political Economy a?id Taxation. (Lon- 
don, 1817.) 

Rowntree, B.I. Poverty. A Study in Town Life. (London, 1901.) 

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Seager, Henry Rogers. Economics: Briefer Course. (New York, 
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liv Suggestions 

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new ed., 1917.) 
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Webb, Sidney and Beatrice. Industrial Democracy. (2 vols., Lon- 
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1909-) 

Webb, Sidney and Beatrice. The Public Organisation of the Labour 
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1911.) 

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Principles of Economics 



Principles of Economics 



Part I 

Introduction 

CHAPTER I 

FUNDAMENTAL CONCEPTS 

1. References 

A. Marshall, Principles of Economics (igio), bk. ii; J. B. Clark, Distribu- 
tion of Wealth (1899), ch. ix, and Essentials of Economic Theory (1907), ch. 
i; W. E, Hearn, Plutology (1864), ch. i; W. Smart, Distribution of Income 
(1899), bk. i; A. T. Hadley, Economics (1896), ch. i; F. A. Fetter, Eco- 
nomic Principles (1915), parts I and II, J. S. Nicholson, Principles of 
Political Economy (1903), Introd.; H. Sidwick, Principles of Political 
Economy (1883), bk. i, ch. iii; F. A. Walker, Political Economy (3d ed., 
1888), part i; A. W. Flux, Economic Principles (1904), ch. i; E. Cannan, 
History of the Theories of Production and Distribution (2d ed., 1904), ch. i; 
H. R. Seager, Principles of Economics (1913), ch. iv; M. Pantaleoni, 
Pure Economics (1898), part i, ch. v; W. S. Jevons, Principles of Econom- 
ics (1905), chs. iii, iv, viii; T. Veblen, The Instinct of Workmanship (1914), 
chs. i, ii; I. Fisher, Capital and Income (1906). 

2. Economic Life 

The starting-point of all human activity is the existence of 
wants. To satisfy hunger and thirst, to secure shelter and to 
provide clothing were the chief aims of primitive man, and 
constitute even to-day the motor forces of all society. As man 
develops, his wants grow in number and refinement. However 
civilized he becomes, his material welfare forms the basis on 
which the whole larger life is erected. To secure the means of 
satisfying wants brings into play the economic activity of man. 

3 



4 Fundamental Concepts [§ 2 

The process may be expressed in the words — wants, efforts, 
satisfactions. We start out with the existence of wants, we 
desire to secure their satisfaction, we can ordinarily accomplish 
this only through some effort. The economic life of man is 
concerned with such efforts and their results. 

The sum of all one's possessions, including at the time 
slaves, wife and children, was termed by the Greeks ecos 
(oLKos); and the method of managing them was called eco- 
nomics {oLKovofiLKr}) — the control or rule {vojjlos) of the house- 
hold (ot/cos). We still speak of the economical man as the 
one who orders the affairs of his household, who manages his 
possessions, with prudence and success. In the wider sense, 
whether he achieves success or not, the economic activity of 
man looks to a provision of the material means to satisfy his 
wants and those of his household. The science which deals 
with these economic activities is called economics or political 
economy. 

Business means etymologically the state of being busy. The 
fundamental thing about which all men must ordinarily busy 
themselves is the satisfaction of their wants. To attain first 
a competence and then a surplus, to provide for one's liveli- 
hood and then to secure a profit, is the essence of business' 
activity. Economics might therefore equally well be defined 
as the science of business activities. 

The motive that guides men in their economic life is some- 
times described as the economic motive. It may best be 
defined as the motive which impels every human being to 
satisfy his wants with the smallest possible effort, or which 
leads him to secure the most pleasure with the least pain. The 
existence of such a motive is undeniable; it is in fact of deep 
and abiding importance; it may even be declared the para- 
mount consideration in the working out of economic law. 
We must, however, not forget that this is not the only influence 
at work in economic life. Human beings are impelled by 
other motives as well; and these other motives may often exert 



§ 2] Economic Life r 

a perceptible influence in economic life. The study of eco- 
nomic history shows us that rehgious, poHtical and ethical 
considerations have profoundly modified economic action itself. 
In the economic life of a primitive Christian community the 
economic motive was of very different importance from that of 
modern industrial life. Even in modern times the economic 
motive is not equally strong everywhere, or equally free from 
the admixture of other influences. The Indian ryot is not 
like the American farmer in his desire to ''get ahead." The 
negro laborer in the South is not so amenable to -the economic 
motive as the stock exchange broker. The salary of a govern- 
ment employee who hopes for official decorations cannot be 
explained in the same way as the wages of a carpenter. An 
analysis of all the motives that influence men in their economic 
life belongs to social psychology, and would disclose widely 
varying effects at different times and places, as well as in 
different individuals or classes at the same time or place. In 
searching for the fundamental laws of economics, it is conven- 
ient to exclude all motives save the economic, since the latter 
is the one of basic significance, and since it would otherwise be 
impossible to formulate economic theory in general terms. In 
applying the law to actual life, however, we must be careful to 
study how its operation is modified by the other — even though 
minor — motives which affect economic action. 

If the "economic motive" is thus open to misconception 
as explaining the whole economic life, the so-called "eco- 
nomic man" is a complete abstraction. By the "economic 
man" is meant the human being dominated by the economic 
motive. Such a man, however, does not really exist. Not 
only do other motives affect the economic life, but side by side 
with the economic life itself are the aesthetic life, the religious 
life, the intellectual life and the multiplicity of other human 
activities. It is indeed the function of economics to study 
that aspect of human activity known as the economic life. 
We must, however, not forget that we are studying man in only 



6 Fundamental Concepts [§ 3 

one phase of his existence. Although there is both an eco- 
nomic and a religious life, there is no economic man, just as 
there is no separable religious man. The business man has his 
family, just as the clergyman has an appetite. The conclusions 
of economic science, therefore, are provisional, not final, con- 
clusions with reference to the conduct of life in general. 

3. Economics or Political Economy ? 

Civilized man cannot be thought of apart from society. In 
fact human beings, whether civilized or not, have from the 
outset lived in some form of social union. Robinson Crusoe is 
not a type, but an anomaly. Without society man could never 
have developed. There would be no such thing as speech, 
morals, law or order. Economic life deals with man as exist- 
ing in society. Economics is hence a social science. 

Economics, however, is not the whole of social science. 
There are as many divisions of social science as there are 
important classes of social relations. Jurisprudence deals with 
the legal relations of society, with certain usages and customs 
which have received the sanction of precedent and have been 
crystallized into law. Ethics, or the science of morals, deals 
with another important grcup of social relations, for individual 
standards of conduct can be understood only in their relation 
to social ethics. Politics treats of the social relations of man 
looked upon as a member of organized society or the state; 
it discusses the connection between the individual and the 
government. Sociology, or the fundamental social science, 
deals with society as a whole, and studies certain general prin- 
ciples that lie at the basis of each of the separate social sciences. 
Economics is one of these separate social sciences. The ethi- 
cal, the legal, the political and the economic relations of men 
are all outgrowths of social life; and what is common to them 
all falls within the province of sociology. 

Why, then do we speak ot political economy? It may be 
frankly confessed that the term is inexact. In one sense 



§ 3] Proper Term 7 

politics, as we have seen, is simply a branch of social science. 
Politics deals with the state; but the state is organized society. 
It is composed of individuals and cannot be conceived as 
apart from individuals. Yet when we use the term political 
science, stress is ordinarily laid on the state; when we speak 
of social science, the emphasis is put on individuals as mem- 
bers of society. It so happens that when the term political 
economy was first used by the Greeks, they thought only of 
the former meaning. Aristotle, after discussing domestic 
economy, tells us that states also, like individuals, must make 
both ends meet. There is, he says, a regal economy, or the 
art of managing the public household in monarchies; there is 
a provincial economy, best suited to provinces; and finally 
there is a political economy, best suited to the "polls," or free 
state. Political economy therefore is to him substantially the 
art of providing a revenue for the state. When the subject 
was again discussed at the close of the middle ages, it was 
seen that the revenue of the state depends upon the revenue 
of the people, and political economy was now conceived of 
as the art of making a people wealthy and powerful through 
national development. It was soon recognized, however, that 
national progress depends chiefly upon the efforts of the indi- 
viduals themselves. Thus in more recent times the stress 
has come to be laid on the causes which condition the eco- 
nomic advance of the various classes of society, and since the 
emphasis is now put on the social rather than on the political 
causes, the science which deals with these problems is properly 
called social economics or, more briefly, economics. 

The world, however, is conservative; and the old term 
political economy, which arose in former centuries when 
attention*was centred on the political side, is still often used. 
Strictly speaking, we ought to employ the term political econ- 
omy only when we treat of the political aspect of economic 
relations, that is, of their direct dependence upon government 
action. People forget that economic activity is primarily 



8 Fundamental Concepts [§ 4 

social, and only in part influenced by political consideralions. 
The force of habit makes them say political economy when 
they really mean social economics or economics proper. 

The foregoing explains the reason for dropping the first 
half of the old term, political economy. The change in the 
second half is due to another cause, — the recognition of the 
scientific character of the study. Many modern sciences end 
with the suffix "ics," as physics, politics or mathematics. 
When the writers of the seventeenth and eighteenth centuries 
first adopted the Greek phrase, they had in mind the endeavor 
to augment the wealth or ''economy" of the state. Hence the 
term. The transition from the point of view of an art to that 
of a science has substituted for the old phrase the newer name 
— economics, that is, the science that deals with the economy 
of society and of the individuals of which it is composed. 

4. The Meaning of Wealth 

It is evident from what has been said that economic activity 
is concerned with wealth. In fact economics is often called 
the science of wealth. But what is wealth? 

To the ordinary man wealth is equivalent to money. When 
we look a little deeper, however, we see that what he means 
is not money, but money's worth. A man's wealth nowa- 
days consists of anything which can be obtained, or sold, for 
money. But this is only a secondary meaning. Money is an 
institution of comparatively recent date; there was wealth 
before there was money. Nor will it suffice to say that wealth 
is that for which something else can be procured through ex- 
change. For although there were exchanges in the shape of 
barter before there was any money, wealth existed even before 
men exchanged their possessions. The fundamental idea is 
something deeper. There are really four characteristics. 

(i) Originally wealth, as the word implies, denoted weal or 
well-being. Whatever a man had in abundance constituted his 
wealth, because it afforded him a surplus. It made him well 



§ 4] Meaning of Wealth g 

off. The capacity of anything lo satisfy a human desire is 
called its utility. . When we speak of the utility of a thing, 
however, we do not pass any judgment upon its moral qualities. 
Whisky and opium may be injurious, yet so far as they satisfy 
existing wants they possess utility. They are called goods 
because they are good for the satisfaction of some want, no 
matter how reprehensible that want may be. In order for 
anything to constitute wealth, the first requisite is that it should 
possess utility, that is, the capacity to satisfy some desire. 

(2) The second characteristic of wealth is that it must be ap- 
propriable. The electricity in a lightning flash may be poten- 
tially useful, but it cannot be appropriated to man's uses. 

(3) The third characteristic of wealth is that it must be 
something external to man. Personal or internal good are a 
contradiction in terms. What is meant is personal or internal 
qualities which are bound up with the individual himself, like 
his physical, mental or moral characteristics. Health is not 
wealth, although it may be the basis of wealth. Man cannot 
part with these qualities; he can only embody them in some 
product which will be serviceable to others. His personal 
qualities may thus enable him to acquire wealth, but they do 
not themselves constitute wealth. To speak of personal wealth 
in any but a metaphorical sense, as a wealth of humor or good 
spirits, is to confuse the fundamental distinction between man 
and his environment. Wealth exists for man, but man himself 
is not wealth (unless indeed he is a slave, and then he is wealth, 
not to himself, but to some one else). Wealth may be produced 
by man, but i"" is the product, not the producer, that constitutes 
wealth. The things that form wealth are always outside of 
man; they are external, not internal, phenomena. 

This does not mean that wealth is necessarily something tan- 
gible. It is indeed true that the term "goods" is sometimes 
preferred to "comxnodities," because the latter is supposed 
to imply something tangible. "Commodity," however, really 
means that which "accommodates" or is "commodious" to us, 



I o Fundamental Concepts [§ 4 

just as goods are those things that are ''good for us," — both 
in the economic sense. If, however, we use- ''commodity" to 
designate some tangible, visible object, wealth is not confined 
to commodities. Utilities may be conferred not only by in- 
animate objects but by human services. A concert satisfies a 
want; what we pay for is not a physical object but a service. 
A teacher receives a salary; what he gives in return is some- 
thing intangible. Services in almost every case bring about 
some change in man's environment, and in that sense even a 
service may be classed as something material. But if by 
material we mean something that has an objective existence, a 
service must be considered immaterial. It confers utilities, it 
is external to man, it is to that extent wealth; but it is not vis- 
ible, tangible wealth. Yet the higher the civilization, the more 
numerous will be these forms of impalpable wealth. 

In reality, however, the distinction between commodities 
and services is slighter than would appear at first blush. For 
in each case we are really dealing with services. The sole use 
of a commodity is the series of services which it can render. 
Whether the music which we hear comes from a music-box or 
from a human voice, whether the boat is propelled by a man 
or an engine, is of no consequence. What we enjoy in each 
case is a service. The only difference is that a service dis- 
appears in the rendering, while a commodity often remains, 
and is capable of similar services in future. The service is 
evanescent, the commodity is often durable. The commodity 
may then be regarded as the embodiment of a series of stored 
up services, to be conferred piecemeal. But the distinction is 
vague. For many commodities, like coal, ice-cream and the 
like, disappear in the very act of rendering a service. Dura- 
bility is no criterion of wealth. An ephemeral service may be 
of far greater importance than a durable commodity. It is the 
character, not the length or repetition, of the service which we 
prize. The real relation between a concrete commodity and 
a service is that the commodity is a crystallized service or a 



§ 4] Meaning of Wealth 1 1 

series of services. The essence of wealth is an inflow of sat- 
isfactions: utilities consist of services, whether or not they 
are embodied in physical objects. The very idea of a ser- 
vice, however, implies something that flows in to one from 
the outside, whether the outside be a man or an object. 
Wealth is always something external. 

* (4) The fourth characteristic of wealth is limitation of supply. 
A few goods and services exist in such plenty that the satisfac- 
tion of our wants is not affected by any consideration of the 
quantity available. The deprivation of any unit in the supply 
will make no difference to us. We all need air, for instance, but 
in ordinary circumstances air is free to all, in unlimited quan- 
tities. Such goods are therefore called free goods. The vast 
majority of commodities, however, are not the free gift of na- 
ture. They exist in such limited amounts that we attach im- 
portance to definite quantities. If we wish to utilize them, we 
must be economical. Hence they are called economic goods 
and form the subject matter of the science of economics. 

Putting it in another way, it may be said that while all 
goods that render a service possess a certain kind of utility, 
only economic goods, or goods limited in supply, possess 
that grade of utility which results in value. As we shall see 
later, value is an estimate of the relative importance or utility 
of definite quantities of goods. When we speak of the value 
of a diamond, the word conveys no precise meaning unless 
we know how large and pure the diamond is. When we say 
a thing is useful, we do not measure its grade of utility; but 
when we say a thing is valuable or worth something, we at 
once ask: hov/ much? In the case of free goods, by which we 
mean goods the amount of which is unlimited, we attach no 
importance to any particular quantity, that is, we set no value 
on it. Wealth might therefore be defined as composed of things 
that possess value, and economics would then be the science 
of value. 

In what has preceded we have virtually affirmed that wealth 



1 2 Fundamental Concepts [§ 4 

means abundance, and at the same time connotes limitation 
of supply. This seems absurd. The apparent absurdity, how- 
ever, is removed by the statement that wealth consists of an 
abundance of things limited in supply. If the supply is lim- 
ited, man will make an effort to secure them; the more scarce 
they are, the more valuable they will be and the more effort 
he will make. Economic action consists in getting the great- 
est results with the least effort. Anything which will afford us 
the same services with less effort will set free surplus energy for 
other purposes, and thus increase our wealth. The irrigation 
tracts in the West represent much effort and much wealth; 
if water were to become as plentiful there as in the East, the 
wealth of the country would be increased, because all the 
efforts devoted to securing water would now be devoted to 
something else, let us say to building railways. The water 
would no longer be wealth, just as the air is not wealth, but 
there would be more wealth than before because there would 
be a larger total inflow of satisfactions. Before, we had only 
the water; now we have the water and the railroads. 

This also explains the seeming opposition between wealth 
and value. Wealth is composed of things having value, and 
yet the more we have of anything, the less its value. This 
statement overlooks the fact that, as we shall see later (§ 76), 
value is an expression of the relative importance of goods, 
while wealth denotes an aggregate of goods possessing value. 
In the example above, the value of water indeed disappeared, 
but was replaced by that of railroads, previously not existing. 
The reduced value of a commodity whose quantity increases 
may be compensated by the new value of something which 
did not exist before; but the aggregate of wealth may be 
augmented. Thus increasing wealth does not mean decreasing 
value in general, for the lower value of some things is balanced 
by the higher value of new things. An increase of commodities 
can never of itself engender a decrease of wealth. 

To recapitulate, in order to constitute wealth, a commodity 



§ 5] Wealth and Man i 3 

must have four qualities. First, it must possess utility: if 
the thing is of no use, it is not a good at all. Secondly, 
it must be appropriable. Thirdly, it must be external: a 
man may be skilful, but he is not wealthy until he has 
transmuted his skill into some actual result. Fourthly, it must 
be limited in amount: if it is free to all, it may make him 
happy, but its possession will not differentiate him from his 
neighbor, and he will attach no specific value to it. 

Since modern society is based on the interchange of posses-* 
sions, all this can be summed up in the statement that wealth 
is nowadays anything that can be exchanged. If it is not 
useful, no one will want it; if it is not appropriable, no one can 
get it; if it is not external, no one can part with it; if it is not 
limited in quantity, no one will give anything for it. Historically 
and fundamentally, however, wealth is anterior to exchange. 
Things do not possess value because they are exchanged; they 
are exchanged because they possess value. 

5. "Wealth and Man 

Wealth, then, forms the subject matter of economics. But 
in what sense? 

If a man chops down a tree for firewood, he is adding to 
his wealth. Yet discussion of the best axe to be used would 
not be an economic discussion. We all need light; yet a study 
of the relative merits of gas and electricity would not necessa- 
rily be economic in character. We may study wealth from 
the technical as well as from the economic point of view. 
The technical study explains the qualities of the thing itself or 
in relation to other things: economics deals with these qualities 
only in their relations to man. A study of the relative merits 
of axes would be technical; a study of the income derived 
from tree-felling is economic. Economics is therefore the 
science of man in his business relations to wealth. The 
emphasis is to be put on the human rather than on the mate- 
rial side of the problem. Since wealth in its economic aspects 



14 Fundamental Concepts [§ 5 

consists of anything that has commercial value, economics may 
also be defined as the science of value in the sense of the 
science of human relations so far as they are affected by value. 

Wealth is at bottom a surplus of satisfactions. We may 
therefore approach the subject from either side, — that of satis- 
faction or of want. In other words, in dealing with the goods 
that constitute wealth we must be mindful not only of their 
acquisition, but also of their use; not only of their production, 
but also of their consumption. In order to grasp the real 
meaning of wealth, we must ask not only, what have you got? 
but, what do you do with it? 

If a savage were to find a watch on the seashore, he might 
prize it as a trinket. As a watch it would be of no use to him. 
For watches to have any material value presupposes a society 
considerably advanced in intelligence. The same commodities 
may be relatively valueless to one generation and exceedingly 
valuable to another. At bottom it is demand which sets in 
motion those forces which result in giving a thing value. The 
social demand for a thing is due to the uses to which it can be 
put. But the uses to which it can be put depend not only on 
the thing to be used but on the individuals who use it. Wealth 
therefore depends in the last instance on man. 

Wealth can be increased only through the multiplication and 
better utilization of commodities. The more and better the 
commodities, the wealthier the population as a whole. This 
multiplication can take place only in obedience to an increased 
demand. Increased demand, however, means a diversification 
of wants. People now want more things of different kinds than 
in the earlier stages of society.' The things they want, however, 
depend in last resort upon their aesthetic, intellectual and moral 
conditions. The physical appetite of civihzed man differs from 
that of the savage only in its being more refined, — that is, 
more aesthetic. It differs not in quantity, but in quality. His 
other appetites also change with the development of civiliza- 
tion. The economic life is therefore ultimately bound up with 



§ 6] Measure of Wealth 1 5 

the whole moral and social life. There is a deeper meaning in 
Ruskin's statements: ''There is no wealth but life," and "Nor 
can any noble thing be wealth except to a noble person." The 
economist in studying wealth must continually bear in mind 
those forces which make civilized human beings; for, after all, 
it is not the wealth itself, but the human beings who create 
and who use the wealth, that are of fundamental importance. 
What a man does with his wealth is a vital question; for upon 
the answer given to this question by society as a whole depends 
the growth of future wealth itself. 

This is equivalent to saying that civilization consists in the 
attempt to multiply wealth, and to render man more amenable 
to those higher forces which will lead him to employ his wealth 
in the true interests of progress. The goal of all economic 
development is to make wealth abundant and to make man 
more able to use wealth correctly. The real object of eco- 
nomics is to explain the process of making wealth cheap, and 
man dear. Education, science, art, ethics, — all have an eco- 
nomic side. 

6. The Measure of Wealth — Income and Capital 

Americans speak of a man as worth a miUion dollars; 
Englishmen would call an equally wealthy man at home worth 
ten thousand pounds a year. In the United States, land is 
assessed for taxation at what it will sell for; in England, at 
what it will rent for. In the one case we estimate wealth by 
the capital value of property, in the other by the income value. 
Capital and income are thus here two phases of the same thing. 
Historically the reason is simple. In the middle ages land 
was the chief form of wealth, but was rarely bought or sold. 
Under the feudal system land had no selHng value, but only a 
rental or income value. A man was rich when he had a large 
rent roll. The custom of measuring wealth by periodical 
income finally spread to all classes of society, because of the 
predominant influence of the landed interest. In the American 



1 6 Fundamental Concepts [§ 6 

colonies, on the other hand, land was abundant and free from 
feudal restrictions; it was, therefore, almost from the begin- 
ning bought and sold like other commodities which exchanged 
hands for definite sums. Thus the selling or capital value 
Carrie to be the measure of wealth in general. Income and 
capital are therefore two aspects of wealth. In the one case 
we measure wealth as a flow of services or stream of satisfac- 
tions; in the other case as a stock of services or fund of 
satisfactions. 

The income measurement of wealth is the more fundamental 
psychologically as well as historically. We desire things at 
bottom because of their utility. They can impart this utility 
only in the shape of a succession of pleasurable sensations. 
These sensations are our true income. Income, in the eco- 
nomic sense, is the inflow of satisfactions from economic goods. 
When water is free to all, the pleasure of drinking it does not 
constitute an income, just as little as basking in the sun, which 
shines on rich and poor alike, is income. When water, how- 
ever, becomes so scarce that it acquires a value, its use affords 
in the broadest sense an income. 

The original conception of income is therefore pleasure or 
benefit income. In modern times value has come to be esti- 
mated in terms of money, and income is accordingly used in 
general to denote the inflow or revenue in money, — the money 
income as opposed to the pleasure or benefit income. If I 
rent my yacht to another, the return is called income, because 
the benefit comes in in the shape of money; if I use the yacht 
myself, the return in the form of satisfaction is not ordinarily 
called income. Yet they are essentially analogous phenomena; 
for no one would pay a sum of money for anything unless it 
afforded him an equivalent amount of satisfaction. Just as 
concrete articles of wealth existed before there was any ex- 
change, so income existed before there was any money. Amid 
a society based on money transactions, however, income de- 
notes any inflow of satisfactions which can be parted with for 



§ 6] Income and Capital 1 7 

money. It may not be money income, but it must be capable 
of being transmuted into money income. 

As against the income, which is at bottom the service or 
satisfaction afforded by anything that has value, is to be put 
capital. When we buy anything we buy the right of securing 
such a satisfaction or stream of satisfactions, either from 
repeated services as such, or from the commodity which 
embodies such services. Every commodity is a store of 
such satisfactions. A suit furnishes a satisfaction or income 
every time it is worn, an axe affords an income every time it 
is used. We may therefore either pay for each service as it is 
rendered or give a lump sum, which capitalizes this anticipated 
income or flow of satisfactions. One may rent the dress-suit 
every night or buy it outright. The process of valuation 
through which we assign a capital value to this complex of 
future income values and through which we transmute the flow 
of satisfactions into a fund is a subtle one, to be discussed later. 
The process is taking place about us every moment. Nothing 
would have any capital value if it had no income value; capi- 
tal is capitalized income. 

This view of capital has not always been recognized. The 
earliest use, indeed, of the word capitale at the close of the 
middle ages was to designate the caput, or principal sum of 
money from which a revenue was expected. Yet it has become 
customary among economists since Adam Smith not only to 
confine the term capital to wealth used for further production, 
in contradistinction to wealth devoted to immediate consump- 
tion, but also to differentiate capital from land. Capital 
would then be defined as that part of wealth which is the 
result of production devoted to further production. The 
consequence has been that capital has often been regarded as 
consisting chiefly of the tools, machinery, factories, ships, cars 
and finished products of all kinds used to increase production. 

This is, however, at variance with business usage. When a 
wagon builder, for instance, counts his capital he always 



1 8 Fundamental Concepts [§ 6 

includes his real estate. The factory may indeed differ in such 
important points from the land on which it is built as to 
justify the erection of a separate category for land, but in one 
sense they are both classes of capital. Again, he includes in 
his capital the stock of finished goods, irrespective of whether 
the wagons are to be used by farmers as tools to garner the 
crops or by millionaires for pleasure. Finally, he includes 
things that have not been produced at all, for instance, mere 
privileges or patent rights granted him by government. His 
capital thus comprises things that have never been produced, 
as well as things that may never be used for further production. 
Capital in this sense is simply wealth which yields or can 
yield an income. It includes everything that has a capital 
value. The wagon is capital to the livery-stable keeper because 
his business income is derived from renting its use day by day 
to customers; the wagon is capital to the farmer because it 
helps him to get an income from the crop; the wagon is capi- 
tal to the millionaire because it embodies a series of incomes, 
which he actually enjoys in kind by riding, or which he could 
enjoy in money if he chose to let it out piecemeal or to sell it 
outright. If a broker fails, his creditors will insist on including 
in the assets or capital not only his stock exchange seat, which 
is not the result of any production, but his real estate holdings 
as well. Both have a capital value. Capital as contrasted with 
income, therefore, is all wealth regarded as a store or fund. 

In every progressive society men seek to enlarge their flow 
of satisfactions. This can normally be done not only by 
enhancing personal efficiency, but primarily by increasing or 
improving the items of wealth which embody this flow of 
income. Economic progress thus normally rests upon the 
devotion of existing wealth to the further increase of wealth; 
and the chief function of capital may accordingly without 
great error be declared to be its productive use. But it must 
not be overlooked that the end of production is consumption 
and that at bottom capital is capitalized income. 



§ 7] Wealth, Money and Property 19 

While income is, therefore, the fundamental test of wealth, 
it ordinarily makes no difference whether we measure a man's 
wealth by his income or his capital. Sometimes, however, a 
difficulty arises. A railway president or trust manager with a 
salary of fifty thousand dollars a year cannot well be called 
poor. Yet a system of taxation based on the measurement of 
wealth by capital, as in the case of the property tax, would 
exempt him completely. The capital estimate of wealth is 
here clearly inadequate. On the other hand, the customary 
restriction of income to money income is also occasionally 
embarrassing. When capital is so used as not to yield a 
money income, as in the case of one's yacht or jewels or 
private park, an income tax would not reach the owner at all. 
The injustice would be no less than in the preceding case. 
Some modern tax laws indeed include in taxable income the 
annual value of a house inhabited by the owner. But the 
inclusion of benefit income in the case of a house and its 
exclusion in the case of a yacht or ^rk are not easy to justify. 
The really safe measure of wealth, applicable in all cases, is 
income in the sense of pleasure or benefit income. 

7. "Wealth, Money and Property 

Whether wealth be measured in terms of capital or of in- 
come, it is generally expressed in terms of money. For wealth 
in modern society is anything that can be exchanged, or that 
possesses an exchange value, and money is admittedly the 
universal medium of exchange. Hence wealth is sometimes 
identified with money. 

It is clear, however, that money is simply a commodity, and 
forms only a part of the entire stock of wealth. It is, indeed, 
a most important constituent of wealth, but acquires this im- 
portance chiefly because it is a representative of other wealth. 
Very little of a man's wealth consists of money, although it 
can all be converted into money. Money is significant not 
for itself but as the universal purchasing medium. In modern 



20 Fundamental Concepts [§ 7 

society the money needed to carry on the daily business trans- 
actions is like the lubricating oil in a machine. Without the 
oil there would be difficulty in making the machine work; 
without the money there would be embarrassment in conducting 
business. But just as too much oil would be not only useless^ 
but harmful, so the existence in a country of more money than 
is needed for the actual transactions would represent a waste 
of wealth which might otherwise be employed in production. 
Money is wealth, but wealth is not money. Wealth is money's 
worth, but wealth and money are by no means identical. 

Finally, we sometimes confuse wealth with property. In 
reality they are not convertible terms. Property is primarily 
a legal conception. It denotes the exclusive right of owner- 
ship in a definite amount of wealth. A man's property is what 
is legally his own, whether his own consists of capital or of 
income, of concrete goods or of mere rights. If a man mort- 
gages his farm for half its value, his real wealth in land is 
reduced one-half; but the title to the land is still his, and in 
most states, like New York, he pays his property tax on the 
entire value. But this was not always so. Formerly the mort- 
gagee or lender entered upon the land and enjoyed its fruits; 
later, he still owned the land legally, but left the mortgagor or 
borrower in possession; now the land remains the property of 
the borrower, subject only to the lien of the lender. From 
the economic point of view the wealth is divided between 
them; legally the land is the property of one party, as in 
former centuries it used to be the property of the other. 
When a man borrows money on mortgage, he is creating a 
new form of property, but not new wealth. There is no more 
land than before, but there is an additional property right in 
the shape of a piece of paper or mortgage which represents 
the title to a certain income. So the real estate and rolling 
stock of a railroad constitute the property of the corporation, 
while the capital stock is the property of the stockholder. 
They form different kinds of property and can be sold sepa- 



§ 8] Public and Private Wealth 21 

rately; yet this duplication of property rights does not increase 
the amount of wealth in existence. -^Property is a legal right 
to wealth; it is not in itself wealth. 

8. Public and Private Wealth 

While there is in most cases little difference whether we 
use capital or income as the measure of private wealth, 
to the wealth of the individual, the distinction becomes im- 
portant in the case of public wealth, or the wealth of the 
community as a whole. To compute the national wealth, 
as some censuses do, by adding to the government property 
the capital or selling value of all private property is erro- 
neous, because, as has just been pointed out, we should be 
counting many things twice. The only true measure of public 
wealth is income. 

Sometimes it is mistakenly stated that the test of commer- 
cial value cannot be applied to public wealth. It is claimed, 
for instance, that rivers, climate and situation, which are not 
and cannot be sold, form the essential constituents of public 
wealth. This involves the same confusion that was encoun- 
tered in discussing the so-called personal wealth of an indi- 
vidual (§ 4). Rivers and climate do not constitute wealth. 
They enable a country to acquire wealth, just as intelHgence 
or strength enables a man to acquire wealth. They are the 
source of wealth, but they are not wealth. America under 
the Indians had the same rivers and climate as now, yet no 
one would speak of the America of a thousand years ago as 
wealthy. Until these natural advantages are converted into 
actual results they do not become wealth. When they are 
finally made to contribute to a flow of income in the shape 
of finished products or services, these products and services 
acquire a commercial value and constitute wealth. The fun- 
damental test of all wealth in modern times is income in the 
shape of benefits that can be parted with, and for which some- 
thing will be given. Public wealth, like private wealth, has a 



2 2 Fundamental Concepts [§ 8 

commercial value, but public wealth can be estimated only in 
terms of income, not of capital. 

The destruction of private wealth can never of itself increase 
public wealth, but the destruction of some forms of private 
wealth may bring about a far greater increase in other forms 
of private wealth and thus augment the public wealth. The 
abolition of slavery annihilated the wealth of the slaveholder; 
but it created the property of the former slave in himself, and 
led to such an increase of productive power that the total out- 
put of society was greater than before. The property of a 
gas company may be rendered valueless by the discovery of 
a natural gas field owned by the community, as in Toledo. 
Yet the destruction of the private wealth of the shareholder 
is far more than offset by the fact that each consumer of gas can 
now devote to productive purposes the sums hitherto necessary 
to pay the gas bills. We say, far more than offset, because the 
wealth of the shareholders was a capitalization of profits, while 
the wealth of the gas consumers is now increased by a sum 
equal to the total price of the gas, including both cost and 
profits. There is, in short, an addition to the net income of 
society, and therefore an increase of public wealth. 

Again, whether the annihilation of private wealth through a 
change from private to public ownership creates public wealth 
or not depends entirely on the success of the undertaking. If 
a government railway can be operated either more cheaply or 
with lower or more equal charges than a private railway, there 
will be an increase of public wealth. The test in every case is 
the flow of income to the individuals that constitute society; 
but this flow under modern conditions always has a commercial 
value. 

Since income is the only adequate test of public wealth, we 
can speak of a wealthy country in two senses. If we think of 
the aggregate income, a large country will be called wealthier 
than a small one; if we think of the average per capita income, 
a small country, like Belgium, would be wealthier than a large 



§ 8] Public and Private Wealth 23 

one like Russia. Inasmuch as the real object of our study is 
not wealth in itself, but man in his relation to wealth, it is 
clear that the second use of the term is preferable. It is the 
participation of an individual in the wealth of the community 
that makes social prosperity. 

The true scope of economics is therefore the study of the 
forces which contribute to the growth of the social income or 
public wealth, and which regulate the shares of classes and 
individuals in this flow of wealth. 



CHAPTER II 
ECONOMIC LAW AND METHOD 

9. References 

L. Cosssi^ Introduction to Political Economy (1893), Theoret. Part, 
chs. iii, vi; J- Keynes, Scope and Method of Political Economy (3d ed., 
1904), chs. ii-iv, vii-viii; J. E. Cairnes, Character and Logical Method 
of Political Economy (2d ed., 1875), Lects. 3, 4; A. Marshall, Principles 
(6th ed., 1910), bk. i, chs v, vi; N. G. Pierson, Principles of Economics 
(1902), Introd.; A. W. Flux, Principles (1904), ch. i; F. A. Walker, 
Political Economy (3d ed., 1888), part i; E. R. A. Seligman, Economic 
Interpretation of History (1902), part 2, ch. iii; W. J. Ashley, Surveys 
(1900), Preliminaries; A. C. Bowley, Statistics (1901), ch. i; H L. 
Moore, Laws of Wages (191 1); R. Mayo-Smith, Statistics and Economics 
(1899), ch. i; H. Sidgwick, Scope and Method of Economic Science 
(1886); J. Koren (ed.) The History of Statistics (1918); G. C. Lewis, 
On the Methods of Observation and Reasoning in Politics (1852), ch. iii; 
E. A. Ross, The Foundations of Sociology (1905), chs. i, ii. 

On the Mathematical Method. W. S. Jevons, Theory of Politi- 
cal Economy (2d ed., 1879), Preface; F. Y. Edgeworth, (i) Mathe- 
matical Psychics (1881); (2) On the Application of Mathematics to 
Political Economy (Jour. Stat. Soc, LII, 1889); (3) On the Representa- 
tion of Statistics by Mathematical FormulcB {Ibid., LXI-LXII, 1898- 
1899); I. Fisher, Mathematical Investigations in the Theory of Value 
and Prices in Conn. Acad., Transactions, IX (1892); C. Cunynghame, 
A Geometrical Political Economy (1904). 

10. Meaning of Economic Law- 
It is sometimes questioned whether there are such things as 
economic laws. The problem has often been complicated by 
the failure to distinguish between the various meanings of the 
term law. (i) Law may denote a body of customary usages, 
as the common law, or primitive law. (2) Law may mean a 
statutory enactment, as a law of Congress. (3) Law may sig- 
nify a rule of action or a precept, as a moral law. (4) Law 
may mean the statement of relations of cause and effect be- 

24 



§ lo] Economic Law 25 

tween phenomena, as a law of physics. When we speak of 
economic law, we properly use the word in the last sense. 
1 Everything that happens in the universe is related either as 
cause or as effect to some other thing. It is the function of 
science to ascertain this relation, and to formulate the law 
which explains the relation. In this sense every scientific 
•law is a natural law, because it deals with the phenomena of 
nature, because it explains the natural or necessary relations 
between things. A scientific law states that definite causes 
necessarily lead to definite results. 

Since economics is the science of industrial relations, an 
economic law is a natural law so far as it interprets the rela- 
tions of human nature to industrial facts. Everything that 
occurs in economic life takes place in accordance with some 
law; it is the function of the economist to ascertain this law. 
Only in this sense can we speak of an immutable economic 
law. An economic law does not mean a precept or rule of 
action; there is nothing immutable about a rule of action. 
To speak of a law of free trade, for instance, is unmeaning. 
An economic law affirms that if^rtain causes exist, certain 
results are sure to follow. The facts themselves, whether of 
human nature or of the outward world, may differ; but given 
definite facts, definite consequences will ensue. The relation 
between these facts is capable of being expressed in a state- 
ment of cause and effect, which we call a scientific law. 

It must not be overlooked, however, that economic laws 
afe'essentially hypothetical. We must be quite sure that the 
premises are true to actual life before we can draw a conclusion 
applicable to existing facts. So far as the premises are only 
partially true, the conclusions are only partly valid. This does 
indeed not prove that there are no economic laws, but only 
that the law may not yet have been ascertained, or that the 
particular statement of the law in question is only provisional. 
In this respect economic law does not differ from any other 
scientific law. 



26 Economic Law and Method [§ lo 

In one point, however, the laws of all the social sciences do 
differ from those of natural science. The social sciences deal 
with man, and man is himself a continually changing factor. 
Man is a product of history; economic institutions, like all 
other social facts, have their roots in the past. What is, is the 
outcome of what has been. With every mutation in outward 
conditions and social relations there comes a change in the 
economic facts or in the methods devised to secure adaptation 
of means to end. Nothing is so rare as the historical per- 
spective; nothing so difficult to realize as the relativity of 
existing institutions. At one stage of scientific inquiry, for 
instance, it was assumed that private property was a natural 
phenomenon, an outcome of the very nature of man. It is 
now seen that private property is not an absolute, but an his- 
torical category; that the conception itself was of slow growth, 
and that its content varies from age to age. What is true of 
private property is true of almost every other economic institu- 
tion. It has grown to be what it is; it has once been differ- 
ent, and will again be different. While there is life, there will 
be change. 

In outward nature, on the other hand, we operate with forces 
that are in one sense unchanging. For instance, in discuss- 
ing physical or astronomical facts we are justified in taking 
for granted the existence of gravitation. In discussing eco- 
nomic facts, however, it would not be safe to assume in every 
case the existence, in unimpaired activity, of the motive of self- 
interest. Not only may there be counteracting forces — for 
that is true also of physics — but the motive itself may suffer a 
change. We cannot appeal to the natural law of self-interest 
in the same sense that we speak of the natural law of gravita- 
tion. The one is dependent on man, the other is independent 
of man. In this sense there are no "natural" laws in social 
science. The frequent appeal in current discussion to the 
natural laws of society as something apart from man, and over 
which he has no control, is erroneous. There are no natural 



§ lo] Economic Law 27 

laws in the sense that man himself is powerless to alter the con- 
ditions which form the basis of the statement. 

The French school of Physiocrats in the eighteenth century 
first applied to economics the conception of natural law as a 
part of the order of nature, from the overwhelming necessity 
of which no one could escape. John Stuart Mill, although he 
still held fast to the old conception of natural law as applied 
to production, pointed out that the laws of distribution were 
themselves capable of being modified by human agency. Mod- 
ern science has shown that what is true of distribution is equally 
true of production, and that there is no natural law as a part 
of a natural order in any field of economic inquiry. The old 
conception of natural law has been abandoned in economics, 
as it has been given up in politics and jurisprudence. In its 
stead has been put the more modern idea of natural law, in 
the sense of scientific law. Modern natural law is essentially 
hypothetical in character and carries with it no moral implication. 

We must be careful, then, not to confuse the two concep- 
tions. An economic law is a natural law so far as it states that 
given conditions will lead to given results. An economic law 
is not a natural law so far as it implies that human effort is 
impotent to modify the conditions which lead to the results. 

It was as a protest against the natural law of the old econo- 
mists that the term historical law was introduced. Some of the 
newer writers urged that the essential point was to study the 
evolution of economic law itself as embodied in the changes of 
economic life. To them the only economic laws were the his- 
torical laws which throw light upon the growth of society and 
trace the development of economic relations. This, however, 
also involved an exaggeration, in that it put more emphasis 
on the past than on the present, and often failed to afford an 
adequate analysis of existing facts. This particular controversy 
has now fortunately been laid to rest. 

Another objection to the idea of economic law may be men- 
tioned. We frequently hear it said that something is true in 



28 Economic Law and Method [§ n 

theory but not in practice. The fallacy of this statement is 
evident when we reflect that a theory is nothing but the formu- 
lation of a law, a statement of the necessary relations between 
facts. If a thing is true in theory, it must be true in practice. 
The difficulty is to formulate the correct theory. When people 
say it is easy to "theorize," they mean that it is easy to frame 
an alleged theory. Nothing is harder than to construct a true 
theory. For a true theory must fit into every fact; otherwise 
it is not the correct theory. The hasty and untrue generaliza- 
tions of those that set themselves up as "theorists" are really 
responsible for the seeming antagonism. There can be as little 
divergence between true economic theory and actual economic 
life as between the theory of chemistry and chemical phenom- 
ena. It is the theory which must be made to fit the facts, and 
not the facts which must be twisted to suit the theory. 

11. Methods of Economic Investigation 

With the broader conception of economic relations, the old 
contest over method has been relegated to the background. 
It was formerly much discussed whether economics was a de- 
ductive or an inductive science; whether, in other words, we 
should start out from certain general principles, or attempt 
to reach these principles through the interrogation of facts. 
Sometimes the contrast between them was expressed by the 
term abstract or analytical, as opposed to the concrete or his- 
torical or comparative method. 

There is at present a substantial agreement among econo- 
mists that both methods are correct, and that it would be a 
mistake to assert the predominance of either. It is a ques- 
tion not of economics in general, but of the particular prob- 
lems to be solved. In some the one method is more fruitful, 
in some the other. In such a problem as the incidence of taxa- 
tion the historical or inductive method would be of little avail, 
because of the difficulty of disentangling the fundamental cause 
from among the complicated facts of actual life. In such a 



§ 12] Relation to Other Sciences 29 

problem as the variation between piece wages and time wages 
the deductive or abstract method would probably not bring 
us to our goal so quickly. Each method has its advantages and 
its limitations. In th e deductive method we can be sure of our 
conclusions only after checking them by the facts; in the induc- 
tive method we cannot formulate the law until we find that it 
is in harmony with well-established principles. In the one case 
we start from the principle and reach the facts; in the other 
we start from/the facts and attain the principle. Neither c an be 
successfully jdivojxed from the other. Injnost cases^ reasoning, 
indeed, we use, consciously or unconsciously, each method in turn. 
Each method, again, when pushed to an extreme is either 
dangerous or barren. The earlier advocates of the abstract 
or analytical school sometimes framed their generalizations 
hastily, and, through their failure to make allowance for the 
numberless counteracting tendencies, often gave an appearance 
of unreality to their conclusions. Such, for example, was the 
celebrated wages-fund theory (§ 173). The more ardent fol- 
lowers of the concrete or historical school have sometimes ex- 
aggerated the difficulty of reaching general laws at all, and 
have left us to wander aimlessly in the forest of facts, putting 
off to an ever-distant day their analysis and utilization. On the 
other hand, the more moderate advocates of each method have 
accomplished a real advance. The historical school has shown 
that we can really understand what is only through a com- 
prehension of what has been, and that the problems of funda- 
mental importance to social well-being are those of change. 
The analytical school has shown that the particular is of value 
only as illustrating the general, and that no true progress in 
economic reasoning can take place until we frankly recognize 
the need and the existence of general principles. 

12. Relation of Economics to Other Sciences 

In the modern hierarchy of thought the points of contact 
between the various sciences are continually becoming more 



30 Economic Law and Method [§ 12 

numerous. We recognize the possibility of regarding facts from 
different points of view. With increasing differentiation, on 
the other hand, there also comes the recognition of increasing 
unity. 

With some sciences the points of contact have been empha- 
sized only in recent years, — as, for instance, with psychology 
and biology. The economist whose chief concern is with the 
law of value necessarily operates with the data of psychology. 
Value can have n'o existence apart from the mental conditions 
of man. The whole conception of demand is essentially psych^o^ 
logical. While, however, the connection between psychology 
and economics is real and intimate, it may be doubted whether 
the psychological treatment of economic relations can carry us 
much further than to the comprehension of the elementary 
principles of valuation. In the same way, it was at one time 
the fashion to apply biological concepts to economic life, and 
to speak of the economic organism, the economic structure 
and the economic functions. It is, however, coming more and 
more to be recognized that these are vague analogies rather than 
identities; that the laws of Hfe in the economic world are not 
the same as those in the physical world; and that the only- 
real aid which biology can give to economics is to enforce the 
conviction that in social as in animal life there is continual 
growth and perpetual change. 

With another class of sciences, mathematics and statistics, 
the relation is more intimate, but primarily from the point of 
view of method. Economics deals in one sense with quanti- 
tative relations. Market values are expressed in figures; and 
mathematics is of undoubted aid in enabhng us to make a 
short cut, as it were, through the mazes of figures. Both alge- 
bra and geometry have frequently been employed with suc- 
cess; and it is remarkable that some of the greatest steps in 
advance in the pure theory of economics have been taken by 
those who, like Cournot or Gossen or Jevons or Marshall, ap- 
proached the subject from the mathematical side. The advo- 



§ 13] Relation to Politics 3 1 

cates of the mathematical method, however, are apt to overshoot 
the mark. They often forget that the range of questions with 
which they can deal is essentially limited, because social pro- 
cesses cannot readily be reduced to exact quantitative form. 
They do not always remember that the variables with which! 
they operate are often precisely the important factors in social ' 
life; and that human aspirations and human needs cannot be' 
pent up within the confines of a mathematical formula, no I 
matter how broad it may appear. Within a narrow field the ! 
mathematical method can be used to great advantage, but it j 
will always be of more use to the writer than to the reader. 

In the case of statistics the danger is of the opposite kind. 
In mathematics the difficulty is to get a law which will not be 
so all-embracing as to be inapplicable to real life. In statis- 
tics, even granted that we have collected the true figures, the 
difficulty consists in distilling from them any general principle 
of lasting value. In the first case we run the risk of formu- 
lating unrealities; in the second of stating platitudes. What 
was said in a preceding section of the abstract and the con- 
crete methods of investigation applies with augmented force 
here. The mathematical method is the abstract method pushed 
to an extreme; the statistical method is the concrete method 
pushed to a like extreme. Statistics form an indispensable 
adjunct to economic inquiry, but they are of value principally 
for purposes of illustration rather than of construction. They 
show us that there is a reign of law in the moral as well as in 
the physical world; they do not always enable us to ascertain 
the law. 

13. Relation of Economics to Politics and Other Moral 

Sciences 

When, however, we come to the moral sciences, of which 
economics itself is one, we notice a more intimate relation. 
These are politics, jurisprudence and ethics. 

(i) The study of politics or the science of the state has gone 



32 Economic Law and Method [§ 13 

through several stages. For a long time history was domi- 
nated by the "great man" theory of politics; attention was cen- 
tered chiefly in the kings and the battles, the court intrigues 
and military problems. At a later period more emphasis was 
put on the development of institutions compared with which 
any individual, however eminent, was insignificant. Finally, 
it was recognized that political life itself is closely intertwined 
with the economic life, and that the forms as well as the prac- 
tices of government are profoundly influenced by the conditions 
of production as well as by those of distribution. Economic 
facts would then be the cause; political phenomena the result. 
On the other hand, since all modern economic action is car- 
ried on within the framework of the state, when we deal with 
any practical economic institution no final solution of the prob- 
lem can be reached until the effect of the political conditions 
be weighed. In discussing the economic consequences of govern- 
ment ownership, for instance, the status of the governmental 
civil service is a potent consideration. Political facts may 
profoundly modify the economic conditions, instead of being 
modified by them. While, therefore, politics deals with the 
relation of the individual to the government, and economics 
with one aspect of the relations of individuals to each other, 
there is almost always a distinct interaction between the two. 
It is a necessity for the publicist to comprehend the economic 
basis of political evolution; it is the business of the economist 
to remember the political conditions which affect economic phe- 
nomena. 

(2) What has been said of politics applies with still greater 
force to jurisprudence. All systems of law are in the main the 
crystallization of long-continued social usage. Social customs 
are coeval with the origin and growth of society itself; the 
mandatory force of the positive law comes at a later stage in 
the evolution. The unwritten gradually turns into the written 
law, until the positive enactment is invested with the sanction 
of a sovereign command. As society develops, the law is in 



§ 13] Relation to Politics 33 

a perpetual process of change. No code is final; it always 
represents a given stage of social life. The law is the outward 
manifestation; the social, and especially the economic, fact is 
the living force. The formal juristic conception may remain 
the same; its content must be modified by every change of 
economic life. Legal history is really a handmaid to economic 
history; legal development is inexplicable apart from economic 
forces. The economic fact in this sense is the cause; the legal 
situation is the result. 

At any given moment, however, economic phenomena take 
place within a legal framework. The elemental forces of eco- 
nomic life cannot indeed in the long run be conditioned by 
legal forms; but the law may for a time hold in check, or give 
a new direction to, economic forces. Take as an example the 
English law of primogeniture and of entailed estates as com- 
pared with the French laws which have led to the system of 
small farms. History is full of instances where the law has for 
good or for evil affected the economic environment. Just be- 
cause the . economic life, however, is prior to the legal system, 
there is always, at any given moment, the danger of a lack of 
harmony between the two. It is in the interval between the 
economic changes and the readjustment of the legal facts that 
the influence of law upon economics is keenly felt. Life indeed 
consists of a perpetual adaptation of outward forms to inner 
forces, and thus the economic basis of a legal system is really 
the important fact to the social philosopher. In practical life, 
however, we deal with outward forms, and thus the legal shape 
of the economic relations must never be lost from sight. In 
economics and jurisprudence there is continual action and 
reaction. 

(3) Close as are the relations of economics with both poli- 
tics and jurisprudence, the connection between economics and 
ethics is closer still. This has often been denied. In the 
popular mind there is even an idea that there is a real conflict 
between them. In truth, this seeming conflict can be traced 
3 



34 Economic Law and Method [§ 13 

back at least as far as Adam Smith; for he based his system 
of political economy on the principle of self-interest, his system 
of ethics on the principle of sympathy. Thus there grew up 
the idea that the two leading motives of human action are the 
purse and the conscience; that the economic man is repre- 
sented by the one and the ethical man by the other; that there 
is a hopeless conflict between them; and that economics and 
ethics have nothing to do with each other. 

The modern view, however, is different. Ethics, like juris- 
prudence and politics, is now recognized as essentially social, in 
its origin. All individual ethics are seen to be the outgrowth 
of social ethics. The very conception of right and wrong was 
originally a social conception, afterwards transferred to the 
individual. Since man lives in society, whatever was recog- 
nized as making for the general good came to be regarded as 
the test of morality. For individuals to persist in doing what 
was not for the social benefit must finally have ended in the 
destruction of society, and therefore of the individual himself 
as' a member of society. Social, not individual, utility there- 
fore unconsciously became the criterion. When we say honesty 
is the best policy, we do not mean that it is always expedient 
for the particular individual to be honest, for we unfortunately 
know of cases to the contrary. What we mean is that honesty 
is the best policy for society, and therefore has become right 
for the individual as well. Ages upon ages of this experience have 
converted this and similar conclusions into a human instinct, 
and have thus made us realize the existence of the categorical 
imperative as the sovereign moral law. The whole ethical 
progress of man consists in conforming his actions to the ideal 
social welfare. 

There can therefore be no conflict between correct economic 
action and true ethical theory. Adam Smith's principles are 
indeed true, but they are complementary, not antagonistic. 
Sympathy or altruism pushed to an extreme involves the destruc- 
tion of self and therefore the death of society; self-interest or 



§ 14] Scope of Economics 35 

egoism pushed to an extreme means the destruction of others 
and therefore likewise the death of society. Social life can 
endure only through a balancing of these two principles, each 
reinforced by the other. Since economics, like ethics, is pri- 
marily a social science, the true economic action must in the 
long run be an ethical action. An individual may pursue selfish 
economic ends, and may augment his own wealth at the cost 
of moral progress; but he is then subordinating public to private 
considerations. Broadly speaking, and regarded from the point 
of view of society as a whole, what is economically advantage- 
ous must in the long run be right; and what is correct in ethics 
must in the end also be profitable to the business world. The 
modern economist therefore has become just as mindful of the 
ethical aspects of every economic problem as the modern moral- 
ist has been forced to recognize the economic side of his ethical 

problem. 

14. Scope of Economics 

From what has been said it will be seen that the scope of 
economics is varied. This cannot be expressed in the old 
way by distinguishing between pure economics and applied or 
practical economics. In the first place, no such sharp Hne 
can be drawn; and, secondly, even if the two parts could be 
distinguished, they would not cover the whole field of eco- 
nomic inquiry. 

The distinction between pure and applied economics has 
been much exaggerated. If the study of economic theory has 
any justification at all, it must fit into the facts of actual bus- 
iness life. There may, indeed, be such a thing as pure mathe- 
matics, which discusses conclusions from premises that exist 
only in the mind of the investigator and find no counterpart in 
actual life. But if there is such a thing as pure economics in 
this sense, it would be of no earthly use except as a logical 
exercise or a play of the imagination. Economics is the sci- 
ence of industrial relations, — not as they might exist hypo- 
thetically in the mind of the investigator, but as they really 



36 Economic Law and Method [§ 14 

exist. Economic law must explain economic facts; the law in- 
heres in the facts, the facts are the embodiment and illustration 
of the law. The attempted distinction between pure and applied 
economics is a clumsy way of putting the emphasis on the two 
sides of the same thing, — the law in its relation to the facts. 

Sometimes the distinction is expressed in another way, as 
when economic science is opposed to economic art. This is 
indeed a distinction; but economic art does not deal with 
principles at all, it deals with precepts. Economic art is an 
awkward expression for the economics of statesmanship. The 
legislator practises economic art; he may or may not study 
economic principle. If, however, he runs counter to the prin- 
ciple, he cannot succeed in the art. 

In the second place, the old distinction between pure and 
applied economics is untenable, because the discipline, whether 
in its abstract form or in its application, is made to deal only 
with actual conditions. The preceding analysis has disclosed 
the inadequacy of this point of view. Economics is to teach 
us to understand the principles of industrial life. Its chief 
object, indeed, is to explain to us what is. If all society, how- 
ever, is the result of an evolution, we can understand what is 
only by knowing what has been. Moreover, if, the relation 
of economics to ethics is such a close one, it is equally evi- 
dent that we can criticise the present not only in the Hght of 
the past, but in the light of the future; and that a discussion 
of social tendencies at once brings up the question of what ought 
to be. Economic inquiry is teleological as well as historical. 

In every phase of our study, therefore, we must endeavor first 
to ascertain how the particular relations have come to be what 
they are; secondly, to explain what are the conditions of the 
problem as it actually exists; and, finally, to forecast the prob- 
able changes in the institutions as a result of an alteration in 
the coiiditions of the problem. Economic science, in short, 
while it deals primarily with the present, cannot avert its glance 
from the past or from the future. 



Part II 
Elements ot Economic Life 



Book I 
Foundations of Economic Life 



CHAPTER III 
THE NATURAL ENVIRONMENT 

15. References 

C. de Montesquieu, Spirit of the Laws (last ed., 1902); H. T. Buckle, 
History of Civilization in Englajid (best ed., 3 vols., 1873); H. Spencer, 
Principles of Sociology, I (1882), part i, ch, iii; E. J. Payne, History of 
America, I (1892), 298-480; E. Huntington, Civilization and Climate 
(1915); E. C. Semple, American History ajtd its Geographical Conditions 
(1903); and Influence of Geographic Environment (191 1); A. P. Brigham, 
Geographic Influences in American History (1903); G. G. Chisholm, 
Handbook of Commercial Geography (8th ed., 1913); N. S. Shaler, The 
United States (2 vols., 1894); J. Brunhes, Human Geography (1920); 
R. S. Tarr Economic Geology of the United States (1900) ; R. P. Teele, 
Irrigation in the United States (1915); E. Mead, Irrigation Institutions 
(1902); Finch and Barker, Geography of the World's Agriculture (191 7); 
R. M. Hurd, Principles of City Land Values (1903), chs. iii, iv; E. A. 
Ross, Foundations of Sociology (1905), chs. viii, x. 

16. Climatic and Geological Conditions 

Man, like all animals, is indissolubly bound to the soil. He 
is in last resort dependent upon nature for what he is and what 
he has accomphshed. This is especially true of his economic 
life, which, as we have seen, consists ultimately of his relation 

2,7 



3 8 Natural Environment [§ i6 

to material things. The basis of economic activity is the 
material environment. The modern sciences of geology, of 
meteorology and of commercial and anthropo-geography have 
enabled us to comprehend phenomena whose significance was 
until recently but vaguely apprehended. The economic aspects 
of the natural environment may be subsumed under the four 
heads of the climate, the geological structure, the flora and 
fauna and the geographical location. 

Only a portion of the globe is habitable. The uninhabitable 
parts, moreover, change with the geologic ages. Large sec- 
tions of Northern Europe and America which are now the homes 
of a vast population were aeons ago in the perpetual embrace 
of the ice king. On the other hand, explorations in the sandy 
wastes of the Asiatic deserts have brought to light the ruins of 
numerous and populous cities. Not only economic life, but 
all life, is at the mercy of the elemental forces of nature. 

Even in the habitable portions of the globe the climatic con- 
ditions are of the first importance. At the very outset the 
influence of temperature is obvious. The vigor of the arctic 
regions and the bounty of the tropical zone are alike hostile 
to economic progress. Where the food supply is scanty and 
the low temperature benumbing, human resources are taxed to 
the utmost in securing the bare wherewithal of life, and no 
surplus energy is left to accumulate a store of wealth. Where, 
on the other hand, nature pours out her treasures with a lavish 
hand, and the torrid heat enervates and lulls into lethargy, 
scarcely any activity is needed to procure subsistence, and 
little is ordinarily exerted for other purposes. Although we 
have had civilization in hot countries, the real home of the 
greatest economic progress has always been in the temperate 
zones, where man is goaded out of his natural laziness by the 
prick of want, and lured on to effort by the hope of reward. 

In many other ways does climate affect economic life. The 
alternations of heat and cold, both seasonal and occasional, 
are of commanding importance. The character and length of 



§ i6] Climatic Conditions 39 

the seasonal alternations condition the size and quality of the 
harvest. The variations of intra-seasonal temperature with 
its sudden oscillations go far to explain the nervous, active 
American temperament and its economic results, as compared 
with the comparative stolidity of the English, due to an equable 
climate. Scarcely second to the influence of temperature is 
the significance of the rainfall and the humidity. Insufficiency 
of moisture and lack of sunshine are alike inimical to economic 
welfare. Not only will differences in rainfall affect the forestry 
conditions, as well as the size and therefore the economic utility 
of the rivers, but in addition the laborious contest with a semi- 
arid region will create in the individual stalwart economic and 
poUtical qualities. The so-called Anglo-Saxon individualism 
is largely the product of climatic conditions. When the English- 
man leaves his moist and fertile home for the almost riverless 
wastes of the antipodes, he becomes, if not a socialist, at all 
events the next remove to one. In Australia we accordingly 
find government railroads, government insurance, government 
steamships, government frozen-meat industry and many other 
examples of government activity which would be viewed with 
dismay in the mother country. 

In the same way the individualist theory in America is largely 
the product of definite economic conditions, resting on a new 
climatic environment. What careful interpreter of American 
history does not know that the arduous struggles with a rebel- 
lious soil and an inhospitable climate caused the American of a 
century ago to turn to government whenever he thought he 
might secure help? State roads, state canals, state railroads, 
state bounties, state enterprises of all kinds suited to the needs 
of the settlers were the order of the day. When, however, 
the mountains had been crossed and the fertile valleys of the 
Middle West, with abundant rainfall and a genial climate, had 
been reached, there came a wondrous change. Conscious of their 
new opportunities, the citizens now desired only to be let alone 
in their quest for prosperity. Private initiative replaced govern- 



40 Natural Environment [§ i6 

ment assistance and the age of corporations was ushered in. 
Insensibly the theory of governmental functions changed, and 
the doctrine of laissez faire carried all before it. The theory 
of individualism was a natural result of the economic, and at 
bottom of the climatic, conditions of a new environment. 

While the climate is one of the causes that influence the 
earth's surface, the economic life is profoundly affected by the 
entire geological formation. In the first place we have the fun- 
damental fact of altitude, including the distinction between 
mountain and valley, coast and plain, with their varying degrees 
of production. Furthermore, upon the chemical ingredients 
and the physical constituency of the soil rests in last analysis 
its original fruitfulness. The difference between the soil of the 
black belt and the hill lands of Alabama explains the varying 
aspect of the negro problem there; and in like manner the 
contrast between the arable and the grazing lands of the Far 
West enables us to comprehend the economic and political con- 
flicts between the farmer and the ranchman. 

Of still more importance than the surface of the earth is 
what lies beneath the surface. There are writers who interpret 
the entire progress of humanity in terms of the metals. While 
this is assuredly an exaggeration, there is no doubt that the 
metals have played a dominating role in the history of economic 
progress. In more primitive times the advance of civilization 
was in many places in large measure bound up with the copper 
and tin deposits. Even at present, with the active interchange 
of commodities, the mineral wealth in the shape of copper and 
iron fields, gold and silver mines, lead and tin deposits, goes 
far to explain the preponderance of the fortunate countries or 
sections where they are found. If we add to the metals the 
coal, the diamond and the oil fields, we shall readily recog- 
nize the enormous influence exerted, especially in modern 
times, by the existence of these mineral treasures in such 
places as Colorado, Pennsylvania, Western England, and South 
Africa. 



§ ly] Geographical Location 41 

17. The Flora, the Fauna and the Geographical Location 

The character and extent of the vegetable and animal life 
are a result of the climatic and geological conditions that have 
just been mentioned. Upon the union in proper proportions 
of rain, sun and chemical ingredients of the soil depends the 
possibility of raising all the staple crops like hay, wheat, cotton, 
rice, tobacco, sugar, coffee or tea, or of obtaining the timber, 
rubber, cork and other products of the forest. The American 
Indian civilization was built up to a large degree on maize, as 
that of the Asiatic Indian largely rested on rice. If cotton 
was king in the South before the war, wheat and hay were to a 
great extent the monarchs in the North. The control of these 
natural resources is responsible for many of the mutations of 
nations. To give only two examples: the struggle for the spice 
islands of the East is the key that unlocks the mysteries of the 
European political contests of the sixteenth and seventeenth, 
centuries; the sugar situation in Cuba led to the revolution 
which brought about our recent Spanish war, and thus indirectly 
the expansion of the American republic into imperialism. 

Of at least equal importance in early economic progress is 
the existence of animals that can easily be domesticated. The 
fact that the horse, the cow and the sheep were found in Asia 
rendered possible the transition from the hunting to the pas- 
toral stage and laid the foundation of the later economic edifice 
of the more advanced Asiatic and European races. For these 
animals subserved the various ends not only of food supply 
and provision of clothing, but of means of locomotion and above 
all of beast of burden. Their absence in recent geological 
periods in America was perhaps the chief cause of the backward- 
ness of the Indians. Where a relatively advanced civilization 
was reached, as by the Incas in Peru, it was in great part due to 
the existence of the llama, although the inferiority of this animal 
to the horse, the cow and the sheep explains in large measure 
the backwardness of the South American civilization. In Aus- 



42 Natural Environment [§ 17 

tralia there was not even this resource, for the kangaroo could 
not be utilized and the blackfellow remained a savage. 

In contrast to the flora and fauna which are of importance 
from the first, favorable situation, although it also plays a role 
from the outset, becomes of signal importance in the later 
stages of economic life when commerce has developed. Prox- 
imity to the sea, possession of a safe and ample harbor, loca- 
tion on a river, — all these explain the maritime supremacy on 
which so much of past civilization has rested. It is no mere 
accident that the world's progress centred for many centuries 
around the Mediterranean, and that Egypt, Greece and Rome 
in turn controlled for thousands of years the destinies of the 
human race. Passing over the mediaeval Italian seaports and 
the German Hansa towns, it is again significant that the two 
greatest metropolitan centres of the world to-day, London and 
New York, have attained their position chiefly because of their 
maritime importance. Some writers have even gone so far as 
to maintain that all civilization can be expressed in terms of 
the great rivers and seas. Of the twenty largest cities of the 
United States, nine are found on the seacoast, five on the 
Northern lakes, and five on the Mississippi and Ohio rivers. 

It would, however, be a mistake to lay too much stress upon 
mere water communication. Trade conducted on terra firma 
has played a scarcely smaller role. Many a populous city is 
nothing but the development of a cross-roads village, become 
the busy mart of transit on a great thoroughfare. The centres 
of the Babylonian and Assyrian civilization of old were largely 
of this character; and to a similar favorable inland situation 
must we ascribe the prosperity of numerous cities in all parts 
of the world to-day, such as Berlin, Manchester (England), 
and Denver, especially where the rivers are few or small. A 
distinguished French author, Demolins, has even ventured to 
explain the existence of the primary social types of humanity 
by the land routes which the various nations traversed in the 
course of the long migrations from their ancestral home to 



§ i8] Change of Environment 43 

their present abodes. However exaggerated this insistence 
upon a single factor may be, there is Httle doubt as to the car- 
dinal influence of location upon commercial opportunities. 

With the further development of economic life, commerce 
becomes a handmaid not only to agriculture but to industry. 
The industrial centres are dependent not only on the commer- 
cial facilities for disposing of their products, but also upon the 
ease with which they can secure the raw material and cheap 
power. Contiguity to the coal and iron fields explains the 
growth of the great steel industries. The presence of local 
water power made possible the early centres of the textile 
industries in New England, as well as the rapid growth of 
Minneapolis in milling. The grain fields of the Middle West 
are responsible for the breweries in the Western and the distil- 
leries in the Eastern States adjoining the Mississippi. The 
slaughtering and meat-packing centres have gradually moved 
west with the change in the ranching frontier, and the incipient 
industries of the Pacific slope are still largely determined by 
their propinquity to the forests, the orchards or the river 
fisheries. 

18. Change of Environment 

While man is thus subservient to nature in his economic 
activities, the subjection is not complete. In fact the distin- 
guishing mark of difference between men and animals is that 
while the natural environment moulds all living things, man 
alone can to some extent modify the environment. This partial 
control of economic resources depends on the spread of intel- 
ligence, the growth of technique and the command that science 
gives over the forces of nature. 

Of all the natural conditions the climate is the most difiicult 
to alter. Yet even here a beginning has been made. We pass 
over with a mere mention such minor points as the mitigation 
of the effects of undue heat through the introduction of artifi- 
cial ice, or the creation of the proper atmospheric conditions 
in certain factories. More significant are the effects of forestry 



44 Natural Environment [§ i8 

and irrigation. It is now coming to be recognized that forests 
play an important role, not so much in affecting the rainfall, as 
in equalizing the flow of the rivers and thus obviating the sudden 
alternations of inundation and drouth with their devastating 
effects on cultivation. The afforestation of treeless lands and 
the reforestation of denuded hillsides are at present a part of 
the economic policy of every careful government. The marked 
increase in the American forest reservations, state as well as 
national, is therefore a subject for congratulation. 

The conditions of moisture are further affected by the drain- 
age and reclamation of swamps and marshes. Prominent 
illustrations of such effects are visible in the English fens and 
the once submerged, but now dyke-protected, lands of Hol- 
land. The history of the Italian Maremma, again, shows the 
alternate consequences of neglect and intelligent effort on climate 
and soil. Even greater results can be achieved by diminishing 
aridity rather than by decreasing excessive moisture. Irrigation 
was practised by the Babylonians, the Persians and other na- 
tions of antiquity, and on a somewhat larger scale by the Arabs 
of mediaeval Spain. The recent damming of the Nile by the 
British constitutes perhaps the high-water mark of modern 
achievement. It is in the United States, however, that the 
greatest conquests of irrigation are to be expected. With the 
gradual exhaustion of the arable area in our public domain the de- 
mand for a reclamation of the so-called arid lands has been 
urged with increasing intensity. The success of the Mormons 
in Utah and the efforts of a few private companies in California 
and elsewhere in converting the desert into a smiling and exu- 
berantly fertile district have shown what can be accomplished. 
The Newlands law of 1902 which set aside for irrigation pur- 
poses under national control the large sums to be derived from 
the sales of public lands marks the beginning of a new epoch 
in American history, for it will ultimately lead to the recovery 
of several tens of millions of acres and to the influx of corre- 
sponding millions of settlers. 



§ i8] Changes in Environment 45 

The nature of the soil as affected by geological conditions 
is, as we have seen, of momentous significance. Yet nothing 
is more certain than the great influence of human effort on the 
character of the soil. Just as the best land can become the 
poorest through wasteful cultivation, so the worst land can be 
converted into the most fruitful. The application of manures, 
both animal and mineral, and the replacement of an extensive 
by an intensive cultivation with the proper rotation of crops 
will soon change the chemical ingredients of the soil. The 
problem is not one of technical possibility, but of economic 
profit. Up to this time there has been in the greater part of 
the western world such an abundance of successively fresh 
tracts of land tjiat adequate returns have been achieved by the 
extensive methods of cultivation involving only the most super- 
ficial tillage. Even the so-called more intensive cultivation 
has denoted only the slightest application of capital to land. 
In the Oriental countries, on the other hand, the ignorance of 
scientific agronomy has made intensive culture depend almost 
wholly upon the hand and not the head. What is really meant 
by the possibilities of the application of science and capital 
to agriculture, in some such proportions as they are now uti- 
lized in industry, may be faintly discerned in the garden patches 
and truck farms in the neighborhood of great cities. In cer- 
tain parts of Europe, in fact, the tenant on the expiration of 
the lease has the right of carting away with him a certain depth 
of soil. The land itself is thus coming to be in a sense the 
product of human energy. 

While the existence of the flora and the fauna ultimately 
depends on the physical environment, there is a large margin 
of indifference within which old species may be reintroduced 
or new ones made to flourish. Many plants in all parts of the 
world are not indigenous. To mention only a few American 
products, rice and cotton in the South, the sugar beet and the 
alfalfa in the West, as well as all kinds of vegetables and fruits 
throughout the length and the breadth of the land, have been 



46 Natural Environment [§ 19 

introduced by human agency from abroad; and the experiment 
stations are constantly at work improving the seed. To pass 
from plants to animals, there is no need of pointing out the 
marvellous results accomplished in bettering the breed and 
economic efficiency of the horse, the ox and the sheep, none 
of which were found here in the age of Columbus. 

19. Changes in Location 

By far the most important achievement of man in altering 
the natural environment is to be seen in his success in over- 
coming the influences of location. This has been effected 
through a threefold improvement in the methods of trans- 
portation and communication, that is, the transportation of 
commodities, the transmission of power and the communi- 
cation of ideas. 

(i) Upon the transportation of commodities has depended 
the growth of all internal trade and international commerce. 
The very conception of commerce involves the transfer of the 
superfluities of one section to the consumers of another, that 
is, the weakening or the annihilation of distance as an eco- 
nomic factor. So long as commerce was dependent upon the 
sail-boat or the slow-moving beast of burden, this annihilation 
of distance found its well-defined limits in the cost and time 
of transportation. With the invention of the canal and the 
application of steam and electricity to land and sea transport, 
a revolution was effected in the saving of cost and time, and 
perishable as well as bulky commodities were now brought 
within the range of both ordinary and distant trade. The 
railway has largely replaced natural advantages of situation by 
artificial ones. A town on the railway line is for all economic 
purposes nearer the market than another off the line, even if 
possessed of a better natural location. A competitive centre 
at the junction of several roads enjoys a superiority which will 
enable it to overcome a rival more advantageously situated by 
nature but less well served. With the increase of facilities and 



§ ip] Changes in Location 47 

lowering of cost, geographical situation is yielding to the facts 
of artificially created location. 

Changes in transportation facilities accordingly are largely 
responsible for the growth and decline of cities, sections and 
nations. With every shifting of trade routes, communities ad- 
vance and recede. Again to confine ourselves to recent history, 
the completion of the Erie canal in 1825 gave to New York, then 
a city of secondary importance, a position of undisputed pre- 
eminence; the construction of many a railroad threw into decay 
the villages on the old post-roads not served by the new lines; 
the piercing of the Isthmus of Panama by the interoceanic canal 
will have the most far-reaching consequences on the industrial 
efficiency of the South and the prosperity of Great Britain. 

(2) If transportation of this kind is so potent in affecting 
the distribution of commodities and thus, by providing a mar- 
ket, indirectly influencing their production, changes in the 
transmission of power are equally effective in their direct in- 
fluence. So far as power is the result of fuel, whether coal, 
wood or oil, it might be claimed that the transmission of power 
is tantamount to the transportation of the commodities out of 
which the power is generated. The recent application of elec- 
tricity, however, bids fair to revolutionize modern industry, 
not only by reducing cost, but by virtually overcoming distance. 
Through transmission of electricity water power is no longer 
limited in its beneficent results to the localities in the imme- 
diate neighborhood. With the gradual extension of the prof- 
itable area of such transmission, we may expect to witness a 
great change in the geographical dependence of industrial 
centres. Moreover, if the day-dreams of certain scientists 
are ever realized, so that in the not distant future we shall 
be able to pick up electricity from the surface of the earth, 
the last link in the chain of the industrial advantages of natural 
location of power will be destroyed. 

It must also not be forgotten that power in industry includes 
not only mechanical power, but human power. The provision 



48 Natural Environment [§ 19 

of the labor force itself is vitally affected by changes in the 
facilities of transportation. In a modern metropolis it may 
be of comparatively little importance whether it takes a few 
hours more or less to transfer commodities to the home or the 
factory. Beyond a certain limit, however, almost every minute 
counts in the time required for the human worker to reach his 
home. The introduction of electric transportation prodigiously 
augmented the possible size and industrial power of modern 
cities, but the bringing of the suburbs within the city limits 
has greatly affected values, and changed the relative advan- 
tages, industrial as well as domestic, of outlying and inter- 
mediate areas. There is a well-nigh kaleidoscopic change 
going on in the conditions of geographical location. 

(3) Finally, the communication of intelligence has played 
its part in reducing the significance of geographical location. 
The post, the telegraph and the telephone have co-operated 
with other economic factors in giving to the modern market 
an international character. The least change in the visible 
supply of wheat in Minnesota or of cotton in Texas is reflected 
in the market at Liverpool. Any alteration in the conditions 
of the tobacco yield in Java or of the tea crop in China is felt 
in the exchanges of New York. But, above all, the dependence 
of particular sections or countries upon mere location has been 
weakened in a special sense by the spread of modern science. 
Science is international in its working; the utilization of dis- 
covery and invention is no longer the exclusive possession of a 
favored nation. The whole world is becoming akin in produc- 
tion, as in consumption. 

Thus it is clear that while external nature still plays its fun- 
damental role in explaining the economic life of man, the pro- 
gress of civilization is utilizing in countless ways certain natural 
forces to counteract and to minimize the influence of other nat- 
ural forces. Nature at bottom remains the mistress, but man 
can within certain limits emancipate himself from the bondage, 
and secure a mastery which will insure prosperity and progress. 



CHAPTER IV 
THE POPULATION 

20. References 

C. D. Wright, Practical Sociology (Am. Citizen Series, 19 12), chs. ii, v, 
viii; R, Mayo-Smith, Statistics and Sociology (1895), part i; A. F, Weber, 
Growth of Cities (1899), chs. iii, v, vi; Thirteenth Census, volumes on 
Population; W. F. Willcox, A Discussion of the Increase of Population 
{Census Bulletin, No. 4, 1904); U. S. Industrial Commission, Report, XIX 
(1902), 1-13; Tenement House Department of New York City, First Re- 
port (2 vols., 1904) ; W. Ogle, On Marriage Rates and Marriage Ages (Jour. 
Stat. Soc, LIII, 1890); C. V. Drysdale, The Small Family System (1914); 

F. S. Crum, Marriage Rate in Massachusetts (Am. Statist. Assoc. Publica- 
tions, V, 1896), and Birth Rate in Massachusetts (Quart. Jour. Econ., XI, 
1897); R. R. Kuczynski, The Fecundity of the Native and Foreign Born 
Population in Massachusetts {Ibid., XVI, 1902); J. Bonar, Malthus and 
his Work (1885); H. Spencer, Principles of Biology, part vi, ch. xii; 

G. H. Knibbs, The Mathematical Theory of Popidation (191 7); F, A. 
Fetter, Economic Principles (1915), chs. 32, 2)3', E. A. Ross, Founda- 
tions of Sociology (1905), ch. ii; J. B. Clark, Essentials of Economic 
Theory (1907), ch. xix. 

21. Density of Population 

While the problem of external nature is primarily physical, 
that of population is principally biological and sociological. 
Population, however, also has its economic aspects. It touches 
the field of production in so far as there is a relation between 
the size and constitution of the population and the creation 
of wealth; it affects the subject of distribution because with 
a given quantity of production, the per capita dividend will 
obviously be influenced by the size of the divisor. 

The subject falls naturally under the heads of the status 
^nd the movement of the population. By the status of the 
4 49 



50 Population [§ 21 

population are meant its density and distribution; under the 
movement of population we have to consider its increase and 
its mobility. 

The density of the population is conditioned by the charac- 
ter of the economic resources and the degree of economic de- 
velopment. That is, it depends not only upon the external 
environment, but upon the use made of it by man. The den- 
sity and distribution of population as dependent upon drainage, 
altitude, temperature and humidity, which play a considerable 
role in the tables of the American census, may be passed over 
here as referable to the influence of the natural elements. The 
human element, by transforming the environment, becomes 
the increasingly important factor in economic progress. It 
is manifest, for instance, that the hunting stage can support 
less inhabitants to the square mile than the pastoral, and that 
an agricultural population must be more thinly scattered than 
a population engaged in industry. In an agricultural com- 
munity, again, the density of the population will vary with the 
character of cultivation. Population is indeed conditioned by 
food supply; but food supply depends not only upon the num- 
ber of acres but upon the product per acre. 

When a community is no longer self-dependent, and carries 
on exchange with another, greater inequality in the density 
of population becomes possible. Industrial and commercial 
communities barter their finished products for the raw ma- 
terials of agricultural sections. While the total population 
still depends on the total food supply, the surplus food of the 
agricultural group is secured by the industrial and commercial 
group, with the result of a greater concentration of population 
in the latter. Density of population in any particular country 
or section which has outgrown primitive economic conditions 
thus depends not so much on the production of food as on the 
existence of the wealth which can procure food. England had 
all through the middle ages a far sparser population than France, 
because although they both exported wheat it was more pre- 




I * I Under 2 iiihab, per sq. miM 

-Lii] 2 to 6 " M ., 
lilll 6 to 18 ^» M „ 
H 18 to 45 ,, 
E45 to 

I OTer 



105° Longitude 101° West fr^ Jj 



DISTRIBUTION OF THE POPUI n 

IRevroduced from R ^ 




eoRMAY 4 C0.„ N.Y. 



)l OF THE UNITED STATES, 1900, 

f'^welfth U. S. Census.! 



§21] 



Density of Population 



51 



1900 


1910 


. 207 


235 


. 188 


IQI 


. 167 


178 


. 97 


100 


• 25 


30.9 




21 




19 


. I.7S 


1.90 



dominantly agricultural; but in the nineteenth century, with 
the prodigious increase in industry and commerce, England 
became a food importer and the density of the English popula- 
tion soon exceeded that of the French. The following table, 
which gives the number of inhabitants per square mile in 1900- 
1910, will show the influence of economic condition on density: 

1900 1910 

Belgium 589 661 Switzerland 

England 437 615 France . . 

Netherlands . . . . 416 460 India . . 

United Kingdom . . 344 474 Spain . . 

Japan 296 344 United States 

Italy 294 313 Turkey . . 

Germany 270 311 Russia . . 

Austria 226 225 Canada . 

The striking facts here are, first, that a very intensive agri- 
culture combined with a moderate commerce, as in China and 
Japan, can support a population as dense as that of a highly 
developed modern industry; and secondly, that the greatest 
density is found in those countries, like Belgium, England and 
Holland, which unite very diversified industry with a fairly 
intensive agriculture. The relative capacity of economic stages 
to support population is illustrated by the conditions of the 
United States. The census, as appears from the map opposite 
page 50, divides the country into six groups with a density 
respectively of less than 2, 2 to 6, 6 to 18, 18 to 45, 45 to 90, and 
over 90 inhabitants to the square mile. The first group com- 
prises the hunting, trapping, fishing, lumbering and mining 
sections; the second includes the grazing communities; the 
third contains the purely agricultural areas; in the fourth group, 
still mainly agricultural, commerce and manufactures have 
commenced to make some progress; while in the fifth and 
sixth groups there is a continually greater influence of industry. 
Computed by states rather than by sections, there were in 1910 
ten commonwealths with a density of over 100, namely, Illinois, 
Delaware, Ohio, Maryland, Pennyslvania, New York, Con- 



52 



Population 



[§ 22 



necticut, New Jersey, Massachusetts and Rhode Island. The 
conditions in each state are indicated in the chart opposite 
page 52. It thus appears that in some of the industrial com- 
monwealths the density of population is about equal to that 
of Europe. 

22. Concentration of Population 

Slightly different from the density is the concentration of 
population. This refers to the distribution between city and 
country. A greater density generally, but not necessarily, im- 
plies a greater agglomeration. New Hampshire, for instance, 
has a greater density of population than California, but a 
smaller urban population. 

The industrial revolution during the nineteenth century and 
the changes in transportation and commerce by which it has 
been attended are chiefly responsible for the drift of popula- 
tion to the cities. In 1790 3.14 per cent of the American people 
lived in cities of 10,000 and more; a century later the seven 
colonies of Australasia with almost precisely the same popula- 
tion as the United States of a century earlier had 33.20 per 
cent living in such cities. In 1790 3.40 per cent of the popu- 
lation of the United States lived in cities of over 8,000; in 
1900 this proportion had grown to 33.1 per cent. In several 
states it is far higher. Taking the states whose urban concen- 
tration largely exceeds that of the average for the entire coun- 
try, the percentage living in cities was in 1910 as follows: 







In Cities Over 






25,000 


10,000 5,000 


2,500 


Rhode Island .... 


67.8 


80.7 


92.5 


96.8 


Massachusetts . . . 


64.1 


77.5 


87.7 


92.9 


Connecticut .... 


48.S 


67-5 


79-4 


89.7 


New York 


67.5 


72-3 


74.1 


76.9 


New Jersey .... 


53-8 


64-5 


70.1 


75-2 


United States 


3I-I 


37-2 


41.9 


46.4 



NUMBER OF INHABITANTS TO THE SQUARE MILE, 
BY STATES AND TERRITORIES, 1910. 

NoXE:-This diagi-am does not include the District of Columbia, wliich.had 
5,518 inhabitants to the square mile in 1910. 

25 50 75 100 125 150 175 200 225 250 275 300 325 350375 400 425450475 500 525 5E 



RHODE ISLAND 

MASSACHUSETTS 

NEW JERSEY 

CONNECTICUT 

NEW YORK 

PENNSYLVANIA 

MARYLAND 

OHIO 

DELAWARE 

ILLINOIS 

INDIANA 

KENTUCKY 

TENNESSEE 

VIRGINIA 

WEST VIRGINIA 

S.CAROLINA 

MICHIGAN 

NEW HAMPSHIRE 

MISSOURI 

N.CAROLINA 

GEORGIA 

ALABAMA 

WISCONSIN 

IOWA 

VERMONT 

MISSISSIPPI 

LOUISIANA 

ARKANSAS 

HAWAII 

MINNESOTA 

MAINE 

OKLAHOMA 

KANSAS 

WASHINGTON 

TEXAS 

NEBRASKA 

CALIFORNIA 

FLORIDA 

S. DAKOTA 

N.DAKOTA 

COLORADO 

OREGON 

UTAH 

IDAHO 

MONTANA 

NEW MEXICO 

ARIZONA 

WYOMING 

NEVADA 

ALASKA 




§ 22] Concentration of Population 53 

As we see, in a few states the urban concentration even 
exceeds that of England and Wales, which amounted in 1901 to 
68 per cent in towns over 10,000 and to 77 per cent in towns 
over 3,000. Only Belgium and Holland exceed the general 
average for the United States, while that of Germany is about 
the same, and that of France somewhat less. 

Within the cities themselves the concentration differs in 
various quarters in almost as marked a degree as it does in the 
different parts of a country. The business sections have 
chiefly a day population, the fine residential quarters a com- 
paratively low density, the crowded slums an exceedingly 
high concentration. Although the recent application of elec- 
tricity to transportation has enormously extended the suburban 
area, there are still sections where the congestion in the centres 
increases from year to year, seemingly unaffected by rapid 
transit. In the tenth ward of New York, for instance — the 
most densely populated area of the civilized world — the 
numbers per acre which amounted to 524 in 1890 rose to 627 
in 1 9 14; while according to the census made by the Conges- 
tion Exhibit in 1908 eleven blocks had a density of over 1,200. 
Compared with these, the highest European figures seem in- 
significant: Josef stadt in Prague, 485; Bonnenouvelle in Paris, 
434; Bethnal Green North in London, 365. 

When we reflect that in the United States over a third, and 
in several states two-thirds or three-fourths, of the people now 
live in cities of over 10,000, and w^hen we notice that the pro- 
gress of agglomeration is unabated, it is apparent that as a result 
of the changing economic conditions the problems of the national 
life of the future are to be in great measure city problems. 
These, however, are largely social and political. So far as 
they are economic in character they fall principally under 
such heads as the influence of city rents on the cost of living 
and rate of wages, the effects of concentration of labor and 
capital on production and distribution, and the consequences 
of urban growth upon depopulation of the rural districts and 



54 Population [§ 23 

the scarcity of farm labor. Some of these will be discussed 

later. 

23. Distribution of Population 

The other facts of distribution of population which have 
important economic bearings are those of sex, age and occupa- 
tion. The percentage of females affects the labor market to 
the extent that women are wage-earners, while a considerable 
predominance of either sex not only influences marriage and 
fecundity but exerts an effect on social life in general. Under 
normal conditions in modern times there is a slight excess of 
females, in Europe about 1,064 females to 1,000 males. Al- 
though the birth rate of males exceeds that of females, there 
is generally a greater mortality among males, due in part to 
their more dangerous occupation, in part to their more un- 
regulated life. In less civilized older countries there is usually 
an excess of males, owing in all probability to the fact that 
more of the arduous labor there falls to the lot of the women. 
In new countries like America there is also a slight excess of 
males, ascribable chiefly to immigration, the percentage in 1910 
being 51.5 males to 48.5 females. The contrast between the 
older and the newer sections is marked, Massachusetts having 
a slight excess of females while Wyoming has only 37.3 per 
cent. That the causes affecting distribution by sex are largely 
economic is shown by the fact that in industrial and commer- 
cial centres, whether American or foreign, where the hard work 
and nervous strain fall chiefly on the men, the preponderance 
of females is always accentuated. 

Distribution by age has important social and political as- 
pects, especially as affecting the school, the voting and the mili- 
tary population.^ For economic purposes, however, the chief 
classification is that of the working population. Although 

1 Of the 92 millions in the United States in 1910, 28 millions, male 
and female, were of the school age (between 6 and 20), 27 millions 
male, of the voting age (over 21), and 20 millions, male, of the militia 
age (18-44). 



§ 23] Distribution of Population 



55 



the proportions of the productive classes vary considerably- 
according to the conditions of child labor, the commonly ac- 
cepted limits are 15 and 65 years respectively. As has often 



POPULATION ACCORDING TO AGE DISTRIBUTION! 



OLD J 
PEOPLE ^ 



ADULTS "N 



INFANTS 



Number living § 
in each "5 
generatioji. ^ 











1 \ 


















/ I 


l\— T 
















1 
1 


/ 1 
/ 1 

/ 


\ \ 

\ 


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AGE 
100 
90 
80 
70 
60 
50 
40 
30 
20 
10 



o 
o 

CQ 



O 

o 

U3 



Triangle X X represents an imaginary population completely stationary, increasing 
annually by a constant number of births and decreasing by an equal number of deaths 
distributed in a precisely equal degree among the various age groups. 

Figure A A represents a population about stationary, with a low birth rate, a low 
death rate and with little immigration or emigration. 

Figure B B represents a population with a high birth rate, a high death rate and much 
emigration. 

American conditions would be represented by a combination of the upper part of A 
and the lower part of B, making the curve look like a top. 

been pointed out and as is illustrated by the chart above, the 
distribution by age may normally be compared to a pyramid, 

^ From Levasseur, La Population Franqaise, Vol. II (1891), pp. 257- 
260. 



56 



Population 



[§^4 



with the infants at the bottom and the aged at the top. Where 
population increases rapidly, the base is broad; where it in- 
creases slowly, the base is narrow and the upper part of the 
pyramid, representing the older classes, bulges out, making it 
bell-shaped. Similar results are caused by migratory move- 
ments. In the case of a large immigration the middle-age classes 
expand and the curve may be compared to a top; in the case 
of emigration the curve sinks in the middle and looks like a 
spindle. It is owing chiefly to this fact that in the industrial 
states as well as in the urban centres, the curve is like a top, 
that is, with the largest proportion of productive classes. The 
difference between industrial and non-industrial states in 1900 
is illustrated in the following table of distribution by ages 
arranged by percentages: 



Years 



United States 
Massachusetts 
South Carolina 



1-15 



31.10 
27. 10 
41 .60 



15-65 



64.87 
67.88 
55-50 



6s- 



4-03 
5.02 
2.90 



Massachusetts had almost ten per cent more of the productive 
classes than South Dakota. A similar lesson is enforced by 
foreign statistics. 

Distribution by occupation naturally follows very closely the 
utilization of the economic resources. Comparative statistics 
of different countries would therefore be meaningless. In the 
United States the tables on page 57 show the great increase in 
the industrial classes, and throw, an interesting light on the 
relative importance of the various industries from the point of 
view of distribution of the population. 



24. Increase of Population 

The increase of population is normally dependent on the 
existence of marriage. To the children born in wedlock must 



§24] 



Increase of Population 



57 



however be added the illegitimate births, which form in dif- 
ferent countries from 3 to 14 per cent of the whole. In some 
large cities like Paris the percentage is as high as 24, and where, 



PERCENTAGE OF DISTRIBUTION OF POPULATION IN 
THE UNITED STATES BY OCCUPATIONS 



1 


1880 


iSgo 


1900 


1910 


Agricultural pursuits 

Professional service 

Domestic and personal service . . . 

Trade and transportation 

Manufacturing and mechanical ... 


44-3 
3-5 
19.7 
10.7 
21.8 


37-7 
4.1 
18.6 
14.6 
25 


35-7 

4-3 
19.2 
16.4 
24.4 


32.9 
4.8 
14.0 
199 
28.3 



NUMBER OF PERSONS ENGAGED IN VARIOUS 
OCCUPATIONS IN 19 10 

Carpenters 817,120 

Coal miners • . 613,924 

Railroad laborers 57o,97S 

Laundresses (not in laundries) 520,004 

Machinists, millwrights and toolmakers . 488,049 

Dressmakers and seamstresses 449,342 

Draymen, teamsters and expressmen 408,469 

Iron and steel workers 368,313 

Painters, glaziers and varnishers 337)355 

Stenographers and typewriters 316,693 

Sewers and sewing machine operators 291,209 

Saw and planing mill employees 260,142 

Blacksmiths, forgemen and hammermen 240,519 

Stationery engineers 231,041 

Tailors and tailoresses 204,608 

Weavers , . 203,718 

Tobacco and cigar operatives 151,519 

as formerly in Bavaria, especially severe marriage laws exist, 
the percentage is even higher. The proportion of single persons 
over 15 years varies from 30 to 50 per cent in different countries, 
the percentage in America being 40 for men and 31 for women. 
If, however, we more properly take the people between 40 and 
60 years as the class that one would usually expect to see mar- 



58 Population [§ 24 

ried, we find that the single persons constitute only 12 to 15 
per cent of the whole. In the American cities the proportion 
of single persons is larger, owing partly to the postponement 
of marriage and partly to the large immigration of young un- 
married persons. The normal marriage rate in most countries 
varies from 14 to 18 married persons annually for each thousand 
of the population, with considerable variations due to general 
economic conditions. Periods of depression, for instance, 
naturally diminish the pre-disposition to marriage, while on the 
other hand when the conditions for the employment of women 
"are favorable, as in some of the New England towns, the mar- 
riage rate is exceptionally high. 

Of almost more importance than the frequency of marriage 
is its fecundity. When we compare the number of births with 
the population as a whole, we speak of a crude birth rate; when 
we compare the births with the number of women of child- 
bearing age (15 to 50 years), we speak of a refined or corrected 
birth rate. The average number of children to a family varies 
in different countries from 3 to 5. In the same country the 
fruitfulness depends not only on color and nationality, as in 
the United States, but also on social and economic conditions, 
'according to the sway of prudential considerations. It is a 
notorious fact that the greatest fecundity is found in the poorer 
classes. It is now also well established that birth rates, like 
marriages, differ at present in cities of the same size according 
to the prevailing industry or occupation. The birth rate per 
thousand of the population as a whole ranges from the excep- 
tionally low figure of 21 in some of the New England states to 
almost 50 in Russia and India. In the United States it was 
about 35 in 1900, but it is falling rapidly in the Eastern states. 
In 191 5 the birth rates in Maine and Vermont were 21.1 and 
21.6 respectively, even lower than in France, where it was 22 
just before the war. In New York the birth rate was only 24, 
and even in Minnesota it was only 24.5. 

The increase of population depends, as has just been inti- 



§ 24] Increase of Population 59 

mated, not only upon the birth rate but upon the death rate, 
It makes a great difference to social progress whether a slow 
increase of numbers is due to the one or to the other cause. 
Whatever may be the conclusion as to the desirability of a low 
birth rate, there can be only one opinion as to the undesira- 
bility of a high death rate. In modern times, at least, civili- 
zation endeavors in every way to arrest mortality and to pro- 
long human life. 

It is quite unnecessary to fortify by statistical data the fam- 
iliar fact that deaths vary according to seasons, age and sex. 
In hot countries the summer, and in cold countries the winter, 
are the most dangerous; in all places infant mortality is by 
far the greatest; and almost everywhere the male death rate 
slightly exceeds the female. In making comparisons we must 
again observe the distinction between the crude and the refined 
rate. The ordinary basis is the number of deaths per thousand 
of the population. Since, however, the rate varies with sex 
and age, the comparison is accurate only when made as be- 
tween the same proportions of sex and age. A rate reduced 
to such proportions is called the refined or corrected death 
rate. Otherwise a country with a relatively larger number of 
children would have a higher death rate. For general purposes, 
however, it has been found that the results of computing ac- 
cording to the crude or to the refined death-rate method do 
not differ sufficiently to change the relative standing of coun- 
tries. In the' American statistics still further accuracy is sought 
by correcting the death rate for race as well as age distribution. 
Using the crude figures, the normal death rate in modern com- 
munities now varies from 14 to 21 per thousand, the former 
being the figure for the United States in 1916. In the cities it 
is considerably higher than in the country, the rural rate some- 
times being as low as 8 or 9, and the urban rate occasionally 
ascending in unhealthy American cities to 35 or even 40. The 
death rate has been markedly reduced in recent times by the 
progress of science in controlling disease, by the growing infre- 



6o Population [§ 25 

quency of war, and by the economic changes which have vir- 
tually eliminated famine, except in relatively backward countries 
like Russia and India. The greatest improvement, however, has 
taken place in the urban death rate, owing to the immense strides 
in modern sanitation, food and milk inspection, housing improve- 
ment and park development. Within a century the death rate 
of Vienna has fallen from 60 to 16; within twenty-five years that 
of London from 50 to 13; and within half a century that of New 
York from 32 to 14. In fact, selected cities in certain countries 
now show a death rate even lower than in rural districts. 

25. Migration of Population 

The final factor which affects changes in the population is 
migration. Internal migration from place to place as well as 
from occupation to occupation is the chief manifestation of 
the modern mobility of labor. In former times, custom, caste, 
settlement laws and the like interposed serious obstacles to 
such movement. Now, under the pressure of the economic 
motive, population shifts with opportunities of bettering one's 
condition. Migration between countries assumes the form of 
emigration and immigration. While immigration swells the 
population of new countries, emigration only rarely diminishes 
the population of an old country; for the gap caused by the 
emigrants is soon filled by the results of an increased birth 
rate due to the improved opportunities at home. Ireland is 
for special reasons a striking exception. 

Where people emigrate to places under the control of the 
mother country they form colonies. Colonies, however, are 
not only colonies of occupation, to afford an outlet for surplus 
population, but also colonies of exploitation, to furnish a vent 
for surplus production of commodities. In modern times we 
may even speak of a third kind of colonies like those of the 
United States, where the aim is neither emigration nor exploi- 
tation, but rather the political and economic elevation of the 
indigenous population. 



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FOREIGN IMMIGRATION TO THE UNITED STATES 
1840-1920 


























































































NUMBER OF IMMIGRANTS. 






















































(To year ending Dec, 31, 1855 figures show alien passengers arrived; 
after year ending Dec. 31, 1855, imnni grants arrived.) 

NET IMMIGRATION 


























































































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YEAR 
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 190 1910 192 

. . i^gQ 




1800 1810 1820 1830 1840 1850 1860 18x70 1880 1890 1900 1910 1920 

YEAR 



§ 25] Migration of Population 61 

If we assume with the anthropologists one original habitat 
for the human race, practically all populations are composed 
of immigrants or descendants of immigrants. Formerly the 
migration was one of tribes or nations; now it is one of individ- 
uals. In the older civilizations these wholesale immigrations 
even of individuals have long since ceased. In countries like 
the United States, however, the movement is still in progress 
on a gigantic scale, probably for the last time in human history. 
Although the immigration has increased largely for the past 
half-century, it has not grown appreciably faster than the native 
population. The foreign born constituted 13.2 per cent of the 
total population in i860; and while the proportion rose slightly 
in the succeeding decade, in 1900 it was again 13.7 and in 1910 
14.5 per cent. This is contrary to the current opinion, but is 
none the less a fact. It is clearly shown on the maps and charts 
following pages 60, 62 and 64, which also illustrate the great 
increase in recent years of immigrants from the South and East 
of Europe as well as the composition of the population in 1910. 

By combining the natural increase with that due to migra- 
tion we arrive at the total increase of population. Up to the 
civil war the population of the United States grew slightly 
more than a third every ten years. Since 1880 the decennial 
rate of increase has diminished, being about 25 per cent for the 
decade ending 1890, and 21 per cent for those ending 1900 and 
1910. Notwithstanding this diminution in the rate of increase, 
it is exceeded only by Argentina, where the rate is approximately 
as large as that of America before i860. In Europe the rate of 
increase is only about one-half of that of the United States; 
but while it is falling in the United States it is rising in Europe. 
On the chart opposite page 61 will be found a statement of the 
comparative increase of population in some of the more 
important countries during recent decades. 

The excess of births over deaths and the rate of increase in 
a few typical countries for 1900 are given in the table on the 
following page. ^ 



62 



Population 



[§ 26 



26. The Law of Population 

The chief problem in the increase of population is its rela- 
tion to prosperity. The so-called law of population, as framed 
by Malthus at the close of the eighteenth century, asserts that 
there is a tendency of population to increase faster than the 
means of subsistence, and that this pressure of population on 
food, unless removed by preventive agencies, will lead to the 
positive checks of misery, vice and crime, by which alone the 



United States . . . 
England and Wales 

Germany 

France 

Italy 

Hungary 



Birth 
Rate. 



35-1 
30.1 
36.2 

22.2 

35-5 
40.5 



Death 
Rate. 



17.4 
18.4 
22.5 
21.6 

24.6 

30-3 



Excess of 
Births. 



17.7 
II. 7 

13-7 

0.6 

10.9 

10.2 



Per cent of 
Decennial 
Increase. 



20.7 
12. 1 
16.2 

1-7 

7.2 

10.3 



Populal ion 

(omitting 

000). 



75,994 
32,526 
56,367 
38,590 
32,475 
19,254 



equilibrium will again be restored. Three conclusions were 
drawn from this doctrine, applicable respectively to socialism, 
to wages and to economic progress. 

(i) The first point is the one which originally set Malthus 
thinking. Some of the French idealists and their English 
followers had been advocating equalitarian or communistic 
schemes of social regeneration. Malthus contended that the 
pressure of population on subsistence would effectually pre- 
clude any such ideal consummation. (2) Again, although 
this came somewhat later, it was claimed that wages depend 
upon demand and supply, and that it was therefore hopeless 
for the laborers to expect more than a bare minimum wage 
unless their numbers were checked. (3) Finally, it was asserted 
that economic progress in general was seriously menaced by 
the danger of over-population, and it was contended that this 
could be averted only by the extensive application of prudence 



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§ 26] Law of Population 63 

and self-restraint, — remedies in the efficacy of which Mai thus 
himself had not much confidence. 

In the original framing of the principle, Malthus maintained 
that the ratio of increase was at best arithmetical in the case of 
food, but geometrical in the case of population. While the 
accuracy of these ratios has been successfully disputed, it still 
remains a question as to whether population really tends to 
increase faster than food. So far as food is concerned, there 
is nj doubt that there are definite limits to its increase, even 
though these limits are more elastic than were originally 
thought. The area of cultivation may be extended, improve- 
ments of all kinds may be applied, hitherto unsuspected forces 
of nature may be utilized; but in the end, as we shall see, the 
law of diminishing returns, which was not at first thought of by 
Malthus, will make itself felt. 

With reference to population, however, two considerations 
have been advanced to offset the contentions of Malthus, — 
the biological and the socio-economic arguments. The bio- 
logical argument asserts that the power of reproduction itself 
diminishes with more complex and civilized beings, and points'' 
to the small famihes of the higher classes and to the increasing 
sterility of the New England women. This argument, however, 
is by no means indisputable; and it is above all uncertain 
whether the diminishing ratio ;§ natural or artificial, — that is, 
whether or not it is a result of volition. The socio-economic 
argument claims that, as a consequence of general social as 
well as economic reasons, the size of families varies inversely 
with wealth, and thus keeps down the ratio of increase. With 
the poorest classes every child is regarded as a prospective 
bread-winner, and to that extent not only a help in the near 
future but an additional support for old age. This leads to 
early and often improvident marriages and large families. In 
the next stratum of society the demands of education and of 
the maintenance of a social position induce more deliberation 
in marriage, and effectively bar the probability of so numerous 



64 Population [§ 26 

a progeny. Finally, where wealth is abundant, the desire care- 
fully to train a few rather than to half train many children, as 
well as the wish to escape the nervous strain of a numerous 
offspring, conspire to restrict the number of children. The 
French peasant is not so different from the average American 
or European resident of a large city. The economic motive 
may be slightly stronger with the former, the other social 
motives slightly stronger with the latter; but in essence they 
are alike. Here again, however, the argument is not anti- 
Mai thusian; for the phenomena just described are the results 
of prudential considerations, and really fall under the head of 
the preventive agencies mentioned by Malthus. 

It might seem, then, that Malthus was right in his premises; 
and since the preventive considerations are proverbially weak 
in the poorer classes, it might be claimed that he was also jus- 
tified in his gloomy forebodings. This conclusion, however, 
does not follow. The real antithesis is proximately at least 
not between population and food, but between population and 
wealth, or productive efficiency. Through a proper organiza- 
tion and utilization of improved methods, production of wealth 
in general may be so augmented as to permit an increase both 
in population and in prosperity. This has happened, for in- 
stance, all through the nineteenth century, even in the older 
countries of Europe; the industrial revolution has not only 
multiplied national wealth, but has greatly increased popula- 
tion, while reducing misery, vice and crime. It might be con- 
tended, indeed, that this is exceptional, because the increased 
numbers have after all been dependent ultimately upon the food 
supply which they have secured from the newly opened areas 
of North and South America; and it might be added that the 
population of these countries is increasing so rapidly that sooner 
or later they also will have no surplus food to export. Even 
granting this contention, however, and looking forward to the 
distant time when all the huge and now uncultivated areas of 
the earth's surface will be utilized for food production, it still 



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§ 26] Law of Population 65 

remains true that the increase of wealth may for almost indef- 
inite periods keep ahead of population. For, as was intimated 
in the last chapter, a really intensive capitalistic system of agri- 
cultural production has never yet been attempted on a large 
scale. If there is enough wealth to put into the soil, it can be 
transmuted into food. The diminishing returns from land can 
be arrested by the increasing returns of a rapidly augmenting 
efficiency of industry in general. The food may indeed cost 
more, but there will be more wealth with which to buy it. 

Not only can wealth be made to increase faster, but, as we 
have seen, the increase of wealth will in itself set in motion those 
economic and sociological forces which tend to reduce the rate 
of increase of population. Thus from both sides the antithesis 
of wealth and population may be weakened. Under favorable 
conditions population may increase gradually, and wealth 
rapidly. 

It is clear, however, that these favorable conditions include 
those of distribution as well as production. The communists 
against whom Malthus wrote were mistaken, but not for the 
reason alleged by him. They thought that a mere change in 
the distribution of wealth would suffice to bring prosperity. 
They failed, just as the socialists of to-day still fail, to realize 
that even an ideal distribution is valueless without enough to 
divide, and that their schemes would dangerously impair pro- 
ductive efficiency. On the other hand, the wages-fund doc- 
trine of the English classical economists erred, as we shall learn, 
chiefly in that it overlooked the connection between wages and 
production, and took no account of the fact that, given a 
greater productive efficiency, more workmen and higher wages 
are perfectly compatible. 

The problem of population as a whole is, then, not one of 
mere size, but of efficient production and equitable distribution. 
That is, it is a problem not of numbers alone but of wealth. 
Since man is the chief labor force, large numbers indeed, other 
things being equal, mean greater national strength and power. 
5 



66 Population x [§26 

But the reverse may be true if other things are not equal. A 
small nation with greater productive efi&ciency, like England, 
will outrank a more populous country, like India. Smaller 
numbers with a fairly equable distribution of wealth are prefer- 
able to a dense population living in the extremes of misery and 
opulence. Mere numbers are therefore not the vital point. 
The world has alternated in its opinion and action. In classic 
antiquity, where the absence of advanced industrial methods 
soon set a limit to production, over-population was a real danger, 
tempered first by emigration and then by infanticide. In the 
middle ages population was sparse, and yet, because of unde- 
veloped production, kept down by famine and disease. With 
the growth of enterprise in the fifteenth and sixteenth cen- 
turies, increase of population was favored but not always se- 
cured. The conditions at the close of the eighteenth century 
seemed to lend color to the fears of Malthus; but for well-nigh 
a century the concern in the advanced industrial countries has 
been not of an unduly rapid but of an unduly slow increase of 
population, until in France to-day it has become a problem 
not of excessive fecundity but of race suicide. 

The doctrine of over-population has therefore lost its terrors 
for modern society. The stress has been shifted from food to 
wealth and efficiency. Productive efficiency, however, depends 
not only upon character and education, intellectual, industrial 
and ethical, but also upon social organization and economic 
methods. The problem of population, in short, is to-day a 
part of the broader problem of the production and distribution 
of wealth. In this sense it is a result rather than a cause. If 
we increase productive efficiency and secure an approach to dis- 
tributive justice, population will adjust itself to the new con- 
ditions either by increasing automatically up to the level of 
comfortable subsistence or by being voluntarily kept down to 
that level. 



Book II 
Development of Economic Life and Thought 



CHAPTER V 
THE ECONOMIC STAGES 

27. References 

C. Biicher, Industrial Evolution (trans, by Wickett, IQOl), chs. i-iiiJ 
R . T. Ely Studies in the Evolution of Industrial Society (1903), part i, ch- 
ili W.J.Ashley English Economic History {2 vo\s., 1888 -1893) ; E. Jenks, 
History of Politics (1900). Types i, ii; W. Cunningham, Growth of English 
Industry (3 vols., 5th ed , 1910-1912); J. A. Hobson, Evolution of Modern 
Capitalism (3d ed , 1912)^ ch. ii, E. J, Simcox, Primitive Civilizations 
(1897) OF, Peschel. Races of Mankind (1876); F. Ratzel, History of 
Mankind (3 vols,, 1 896-1 898); J. Lubbock, Races of Man (1888); and 
Origin of Civilization (1870) ; L. H, Morgan, Ancient Society (1878) ; A. H. 
Keane. Man^ Past and Present (1899); Spencer and Gillen, Native Tribes 
of Central Australia (1899) and Northern Tribes of Central Australia 
(1904): A. W. Howitt, N live Tribes of South East Australia (1904); O. T. 
MsLSoUt Origin of Invention (Smithsonian Institution, Publications^ 1895); 
P. G. H. Grierson, The Silent Trade (1903); A. Loria, Economic Founda- 
tions of Society (trans, by Keasbey, 1899); G. Schmoller, The Mercantile 
System (trans, by Ashley, 1896) ; T. Warner, Landmarks in English Indus- 
trial History (1899); E, Lipson, An Introduction to the Economic History 
of England (1915); L. C. A. Knowles, The Industrial and Commercial 
Revolutions in Great Britain during the Nineteenth Century (1921). 

28. Economic Development 

Inasmuch as (economic life is many-sided, it is not easy to 
single out the fundamental characteristics of its development. 
Most of the current explanations err in one of three ways: some 
mistake the accident for the essence; some are so incomplete 

67 



68 Economic Stages [§ 28 

as to be of little real use; some are so general as to be either 
vague or inadequate. 

(i) Of the first class a good example is the division into the 
three periods of barter, money and credit economy. In the first 
period men exchanged their superfluities through the medium 
of barter alone; in the second period money was. invented to 
facilitate trade; in the third, credit was devised to supplement 
the money supply. All this is true enough, but does not go suf- 
ficiently deep. It does not show which is cause and which is 
effect. It does not tell us why these transitions occurred, nor 
explain the basic changes in the industrial organization of which 
these transitions are only the outward forms. Of much the 
same character is the division of economic life into the three 
stages of the animal, the vegetable and the mineral economy. 
In the first period, we are told, men lived primarily on the 
results of the chase; in the second, on the fruits of the earth; 
while, in the third, science is continually expanding the scope 
of chemical substitutes for animal and vegetable food. It is 
obvious that even if this statement were correct, it would not 
make clear the fundamental facts of economic organization. 

(2) The second class of explanations comprises all kinds of 
half-truths or statements which while true in themselves are 
incomplete. In this category belong Maine's famous law that 
the world has progressed from a condition of status to one of 
contract, and Spencer's law of the evolution from militant to 
industrial society. Of a like nature is the assertion that the 
world has gone through the stages of slavery, serfdom and free 
labor; or that it has advanced from common to private property, 
or from bimetallism to monometallism, or from custom to com- 
petition. All such statements may be true and even serviceable 
within a limited field, but for the purpose of disclosing the real 
inwardness of general economic progress they are of minor 
importance, 

(3) The most conspicuous illustration of the third class of 
explanations is the venerable classification into the five stages, 



§ 29] Primitive Technique 69 

— the hunting, the pastoral, the agricultural, the commercial 
and the industrial stage. This description, however, is both 
inaccurate and vague. Not only is hunting not the first stage, 
but the sequence of the stages is not necessarily the one men- 
tioned. Moreover, the generalization is too broad to afford 
much help in the explanation of modern conditions. Rome is 
supposed to have gone through these stages, and yet the later 
Roman civilization differed in fundamental economic respects 
from our own. A version of economic history which would 
throw imperial Rome and modern England into the same cate- 
gory is manifestly too broad to be serviceable. Of a similar 
character is the division of economic life into the stone, the 
bronze, the iron and the steel age. The iron age covers so many 
heterogeneous forms of economic civilization that the classifica- 
tion is useful chiefly for archaeological purposes. 

Before proceeding, however, to give the more modern ex- 
planation of economic progress, it may be wise to dwell for a 
moment on the last two classifications which, when correctly 
put, still possess a certain use for the early periods of society. 

29. Primitive Technique 

(i) At the outset and for a long time, man, like his simian 
ancestor, lived on wild berries, nuts, roots and herbs. He 
roamed about, as do some of the Australasians to-day, in small 
groups of twenty to fifty, in alternating periods of plenty and 
want, according to the season or the fortunes of the weather. 
Each group was for the purposes of the food supply entirely 
independent. Primitive man, however, as the physical con- 
formation of his teeth and jaws shows, was not only herbivorous 
but carnivorous. When geographical reasons favored, he varied 
his diet by fishing, and in many cases he practised cannibalism, 
not only on his enemies, but also on the old and useless mem- 
bers of his own social group. 

(2) The root-grubbing period was, we shall not say suc- 
ceeded, but rather supplemented, by the hunting stage in 



JO Economic Stages [§ 29 

certain portions of the world where game was abundant. This, 
however, presupposes a certain technical development. Man 
is distinguished from his prey primarily by the use of weapons 
and tools. The history of civilization is very largely the his- 
tory of technique. There was at first no distinction between 
weapons and tools. The weapon was the only tool for both 
defence and offence. The earliest weapons consisted of objects 
ready at hand, — wooden sticks, animal bones, tusks and teeth, 
pieces of stone. 

(3) The combination of these was one of the great steps in 
advance. It changed the primitive club or missile into a mod- 
erately effective weapon. The affixing of a flint to a stick, 
or the fastening of jagged teeth to pieces of wood by wisps of 
grass or strips of hide or catgut were the first triumph of human 
ingenuity. The bone and the stone age lasted for countless 
generations. In the course of time implements were found 
serviceable not only for warfare but for the saving of toil; in 
other words, by the side of the weapon we find the tool. In this 
transition perhaps the mightiest factor was the utilization of 
fire. What was a terror to brute creation became a servant 
to man. Originally obtained from a chance conflagration, 
the spark of fire was zealously guarded, and was soon invested 
with sacred attributes. In some cases it even became the basis 
of the religion itself. Although we find savage races to-day 
who understand the secret of creating fire by friction, the easier 
method was to ignite the brand from the ever-burning flame. 
The chief function of the vestal virgins in Rome was to keep 
the perpetual fire; and in the Catholic church to-day with its 
never-extinguished light we have the last survival of what was 
once a fundamental social custom.^ 

^ The testimony given before the New York gas commission in 1905 
affords another curious illustration of the survival of this custom. One 
of the officials stated that whenever the location of the gas works is 
changed, the fire is transferred by a brand from the old to the new 
building. Under no consideration would a new fire be started. 



§ 29] Primitive Technique 71 

(4) Fire was utilized not only for purposes of warmth, but 
also for the better preparation and conservation of food, thus 
making man less dependent on his immediate surroundings. 
From that time on, although environment still makes the man, 
man to an ever-increasing degree succeeds in changing the 
environment. The most signal service of fire, however, was 
in the improvement of tools. Its uses became most marked 
when metals were employed. Even the tools of wood and 
stone, however, were greatly improved thereby. So slow was 
the development that it took countless centuries for the old 
stone or palaeolithic age to change into the new stone or neo- 
lithic age. We find flint weapons at least 100,000 years old. 
During this transition man had learned to rub, to sharpen, to 
bore, to cut, to plane and to polish the bones and stones so as 
to produce arrows, knives, javelins, hammers, millstones, 
daggers and saws. In all this he was simply imitating the ex- 
perience of parts of his own body: in the saw we have the 
improved tooth, in the hammer the strengthened fist, in the 
scoop the enlarged hollow of the hand, in the hook the crooked 
finger, in the javelin the lengthened arm, in the knife the 
sharpened nail. Hand in hand with this went the invention 
of the earliest utensils. From the animal's horn to the beaker, 
from the hollowed wood to the osier basket, from the natural 
gourd to the artificial jug, does not seem so great a steji. 
Yet the invention of pottery has been deemed by some so im- 
portant as to constitute a revolution in human civilization. 
Weapons, tools, utensils, — these typify the onward march 
of the human race; they are the outward technical manifesta- 
tion of man's intellectual progress and the physical basis of his 
economic development. 

(5) From the purely technical point of view the stone age 
was succeeded by that of metal. Without the use of fire for 
smelting this would of course have been impossible. Archaeolo- 
gists not so long ago thought that the copper and bronze ages 
everywhere preceded that of iron. This can, however, be 



72 Economic Stages [§ 30 

accepted only with qualifications. It now seems probable 
that the rougher forms of iron were utilized before bronze was 
invented. In certain countries we find no bronze age at all, 
because of the lack of one or both of the constituent compo- 
nents, tin and copper. In the civilizations that grew up about 
the Mediterranean, however, first copper and then bronze 
drove out the primitive and rougher iron implements, until 
after several centuries the improved extractive processes assured 
the final victory to the finer iron tools and thus instituted the 
true iron age. With the advent of this, man's mastery over 
nature was definitely assured. 

30. Transition from the Lo"wer Stages of Civilization 

It is obvious that metallic weapons and implements would 
be of the greatest service to both hunters and fishers, and in 
truth we find some of the more advanced hunting civiHzations 
acquainted with the use of rougher iron. But the continuance 
of the hunting stage, as well as the character of its transition 
to a subsequent stage, depends not so much upon the kind of 
weapon as upon the conditions of nature and the relations of 
population to the land. Under certain circumstances where 
game began to become scarce, it was discovered, at first by mere 
accident, that a less precarious food supply could be secured 
by preserving various animals and caring for their increase, 
rather than by devouring at once the entire product of the chase. 
The domestication of animals was a discovery of momentous 
import, and with their multiplication first for food, then for 
transport, and finally for clothing, protection and pleasure, we 
have the conditions for the transition to the pastoral stage. 
Although this is often called the nomadic stage because of the 
perpetual shifting of the community in quest of fresh pasture, 
the term is badly chosen, because there is on the whole less 
nomadism than in the hunting age. The chief result of the 
domestication of animals was the assurance of a permanent, 
even though an artificial, food supply, or at all events one that 



§ 3o] Transition 73 

depended on the foresight and care of man. Cannibalism disap- 
peared and famines became less frequent. Another consequence 
was the possibility of supporting a larger population on the same 
area. Finally, the permanent possession of cattle became an ob- 
ject of desire, and private property developed on a large scale, 
with corresponding differences of wealth and of social classes. 

It is, however, erroneous to assume that the hunter was nec- 
essarily succeeded by the hersdman. In the first place animals 
capable of domestication were not found everywhere. On the 
American continent no pastoral life was possible with the llama 
alone. Secondly, whole stretches of land, both in Africa and 
in Asia, were unsuitable for grazing purposes. It is only where 
all the geographical* and climatic conditions were favorable, 
as on the great Asiatic and North African plains, that we find 
the transition to the pastoral age. 

In the same way it is erroneous to think that the herdsman 
was everywhere succeeded by the farmer. A certain degree 
of agriculture is often found combined with the hunting or 
fishing stage. In fact, it is only a small step from the original 
root-grubbing to primitive agriculture. When, again presum- 
ably by accident, it was found that the seeds would multiply 
themselves, and that the stick was more effective for grubbing 
than the finger, we have the beginning of the cultivation of 
the soil. Just as human foresight led men under certain con- 
ditions to preserve animals in order to secure an increase, the 
same quality led them under other conditions to preserve plants. 
If flock tending is a result of the domestication of wild animals, 
agriculture is a result of the domestication of wild plants. Be- 
cause of the temporary patch near the hunter's tent, some, like 
Morgan, call this system horticulture; because of the primitive 
tools, others call it hoe culture. Both terms are unfortunate, 
the one because horticulture {i. e. garden culture) at present 
signifies a very developed form of tilling the soil; the other, 
because the hoe has even to-day been by no means completely 
superseded by the plough. 



74 Economic Stages [§ 30 

What is reasonably sure is that the primitive tilling of the 
soil was carried on by the hunters', wives and daughters as a 
subordinate and auxiliary means of support. It was only at 
a much later period that agriculture acquired more importance, 
and it was not until the game supply had been practically ex- 
hausted that the chief reliance was put on agriculture, and the 
roving life of the hunter gave way to the settled habitation of 
the farmer. These periods in agriculture may exist, moreover, 
in connection not only with the hunting stage, but also with the 
pastoral stage. In fact, the most careful investigators now 
believe that the domestication of animals was not an achieve- 
ment of the hunter at all, but of the primitive farmer, and that 
the pastoral life was an outgrowth of early agriculture. With- 
out a knowledge of all the details, therefore, it is impossible to 
assert the exact chronological sequence of the stages. 

Much the same may be said of the transition to the later 
stages of commerce and industry. The commercial stage does 
not necessarily follow the agricultural stage, but often precedes 
it. In the case of many coast peoples, the fishing and commer- 
cial stages appear at the same time, without the intervention 
of agriculture. And in more developed civilizations, like that 
of Venice, for instance, we find the pastoral stage develop at 
once into the commercial stage without reaching the industrial 
stage. 

The time-honored classification of economic progress is thus 
not only inexact in itself, but of comparatively little service in 
explaining the great changes that have supervened since the 
adoption of agriculture. For this purpose a somewhat different 
line of cleavage seems desirable. 

If we regard economic conditions from the standpoint of the 
relations of production to consumption — for these are the 
fundamental economic facts — we may divide the world's his- 
tory into three great stages, known respectively as the self- 
sufficing economy, the trade or commercial economy and the 
capitalist or industrial economy. From another point of view 



§ 3i] Isolated Economy 7^ 

these may also be called the isolated economy, the local or village 
economy and the national economy. These we shall now 
proceed to consider, 

31. Self-sufficing or Isolated Economy 

By this term is meant a form of organization where the 
economic unit or household produces everything that it needs 
and consumes all that it produces. In its typical form the 
household raises the raw materials for food and for clothing, 
provides its own shelter and works up into finished products 
everything necessary for its final consumption. What little 
division of labor exists takes place within the household, and 
grows only with the expansion of the household's needs. 
Whether the household is small or large, however, it is always 
a unit by itself; it has normally no necessary relations with any 
other unit. Its economic characteristic is its self-sufficiency 
and therefore its isolation. 

This self-sufficing economy assumes many different aspects 
in the course of history. The economic unit may be either 
a family or a larger group. It may rest either on slave labor 
or on free labor. It is the universal form of the beginnings of 
society, in the root-grubbing or hunting stages, and is always 
found in the early periods of the pastoral and agricultural stages. 
It is seen in the frontier life of more advanced communities, 
for the family of the backwoodsman in the United States is in 
this respect like the earliest groups known to history. It is 
found in Greece, where the landed estate was called the oikos. 
It is typified in the Roman familia, which is the name for the 
entire possessions of the Roman citizen, including his wife, 
his children, his slaves, his land and all his other belongings. 
It is represented in the manor of mediaeval Europe and in the 
plantation of the American slaveholder. It is found even 
to-day in the Russian mir, or village community, and in some of 
the Danubian principalities. 

Everywhere the distinguishing mark is the self-sufficiency, 



76 Economic Stages [§ 31 

or home production and home consumption, of the economic 
unit. It is not a question of slavery, for we find the same 
economic form in the mediaeval manor resting on serfdom, and 
in the primitive or still surviving community of freemen. It 
is not a question of autocratic power, for we find it equally in 
the democratic Russian mir and the aristocratic American plan- 
tation. However different the forms, the essence is the same. 
The landlord, whether a single person or a group, is the property 
lord. The estate forms a complex whole. Production is carried 
on by the group, and there is no sharp line between producers 
and consumers. The wants of the group members are satisfied 
by their own labor, and not by that of some other economic 
unit. As consumers they are no less independent than as 
producers. 

In the course of time, indeed, the households that possess 
natural or acquired advantages in the production of certain 
commodities learn to raise a surplus, and trade it off to other 
groups for various purposes, — at first propitiatory in character, 
but later in the expectation of securing similar advantages in 
return. In this way barter develops. But at the outset, and 
for a long time, there is no barter, because in a typical, 
self-sufficing economy there is no need of barter. In fact, the 
exchange of commodities seems wrong because it is unnatural. 
The propensity to "truck," which Adam Smith considered nat- 
ural to man, is in reahty the outcome of a long evolution. To 
truck is etymologically to trick, just as barter in its original form 
(old French hareter) means to cheat.^ Even when exchanges 
develop, the transactions are always attended by rigid formali- 
ties, often invested with a religious sanction. 

The fact of exchange between the groups does not neces- 
sarily alter the organization of economic life, as long as the great 
mass of commodities are produced and consumed at home. 

1 This meaning has survived in our " barrator,'* although by a cu- 
rious development it is now confined to the deceitful shipmaster, or to 
the cheating and meddlesome instigator of litigation. 



§ 32] Commercial Economy 77 

Thus, for instance, we find in the later centuries of Greek life 
that many of the estates produced raw materials, and sometimes 
luxuries, to be sold in the cities which enjoyed an active com- 
mercial life. So in Rome during the period of its greatest pros- '^ 
perity, the large estates devoted themselves to some one product, 
like wine or oil or wheat for export, which was carried on by 
large trading companies. So, again, in the American plantation 
a single commodity, like tobacco or cotton or sugar, raised for 
export and handled in the towns, generally constituted the very 
foundation of its success. It is still true, however, that even 
in these cases the great mass of commodities used at home 
was produced at home. While there was trade between the 
units, there was little if any trade within the units, and whUe 
exchanges in the bulk even as between the units amounted to 
a large sum, they played a small role in the daily life of each 
household. Just as the plantation and not the towns gave the 
imprint to the civilization of the South, so the mir and not the 
cities typify the Russian economic life, so the estates and not 
the commercial companies shaped the history of republican 
Rome. In its essence the economic unit was still predominantly 
self-sufficing. Even where there is a surplus production for 
the market, the consumers within the group are in an over- 
whelming degree dependent on the exertions of the group. 

With the growth of commercial intercourse both within and 
between those early economic groups, the self-sufficing character : 
of the unit begins to disappear, and there is gradually ushered 
in the next stage of economic life. 

32. Trade or Commercial Economy 

The characteristic feature of this stage is the fact that pro- 
duction is no longer followed directly by consumption, but that 
there is interposed the process of exchange. The demand of 
consumers is now met primarily through the medium of trade 
or commerce. The significance of trade does not arise from the 
fact that there is trade between the units, for, as we have just 



78 Economic Stages [§32 

seen, such trade is found in the later stages of the isolated or 
household economy. But we now have trade within the unit. 
The members of the household no longer, as before, produce 
^ what they need, but primarily produce what others need. We 
now have separate classes of producers and separate classes 
of consumers. Men for the most part no longer consume their 
own products, but the products of others which they secure 
through trade. In other words, instead of the self-sufhcing 
economy we have the trade or commercial economy. 

The unit of economic life, although broader than before, 
still remains local in character, and the trade and industry are 
largely centred in the villages. Hence we also speak of it as 
the local or village economy. We can study this stage most 
clearly in mediaeval history. The eleventh and twelfth cen- 
turies witnessed an immense impetus given to commerce, due 
chiefly to the opening of new routes by the Crusades. The 
markets and fairs which had begun on a small scale in the pre- 
ceding centuries now became the rule, and soon assumed a more 
permanent form in the shape of villages and towns. The medi- 
aeval town was shut off from its neighbors not only by the actual 
wall of stone and mortar, but by the no less important economic 
barrier of trade monopoly; only the townsman, the burgess, 
might freely buy or sell; only he was admitted to the many 
trade privileges. On the basis of this economic separation was 
built up the political independence which is so marked a char- 
acteristic of early communal life. Although we call it the village 
economy, it is evident that the economic unit was not the village 
or town itself, but the village with the outlying territory. The 
lands or estates provided the raw materials which were worked 
up into finished products within the town. 

The breaking up of the older unit, moreover, enhanced the 
importance of industry. In the preceding stage industry was 
scarcely differentiated from agriculture. The farmer was his 
own carpenter, the farmer's wife did the haying and made the 
family clothes. Even where the estates became so large that 



§ S2] Commercial Economy yg 

there were separate classes of industrial workers, they were all 
under the control of the landowner. Now, however, the village 
workmen began to form an independent class, even though 
many of the workmen might have a little garden patch of their 
own. The point is that they no longer raised the raw material 
for industry, but bought it. The farmers grew the material, 
the village artisans turned out the product and each class pro- 
gressed by trading with the other. 

The new industry was based on trade in another sense. The 
artisan not only bought the raw material in small quantities, 
but sold in his shop or in his booth at the fair the products 
which he himself had finished. The workman was primarily 
a trader, and his success depended as much on his shrewdness 
in trade as on his skill in industry. It was only by degrees that 
the artisans pure and simple became a separate class and that 
trade was carried on by the large merchants. For a long time 
business was chiefly of a retail character conducted in the local 
markets and fairs, and even when the scale of transactions in a 
few staple articles reached the stage of wholesale trade, the 
modern machinery of commerce was entirely lacking. 

The increasing importance of the trader and the workman was 
the chief cause of the growing sense of liberty and equality; 
the mediaeval town was the birthplace of modern democracy. 
It took a long time, however, for industry and trade to attain 
a dominant position. After some temporary victories in Italy, 
the trade centres won their first lasting triumph in the Low 
Countries, and it is accordingly there that we find the earhest 
example of modern republics on a large scale. 

In the later development of this economic stage there were 
indeed great accumulations of wealth gained in commerce or 
wholesale trade side by side with the wealth in land. We have 
not only the feudal landlords but the merchant princes. If we 
choose to apply the modern term capital to such accumulations, 
we find agricultural capital and commercial capital, but with 
rare exceptions no industrial capital. The wealth drawn from 



8o Economic Stages [§ 32 

the land was under prevailing conditions not again put into the 
land, but consumed by the landowners; the wealth accumulated 
in trade could not go on indefinitely multiplying ships and 
vans without increasing the commodities to be transported; 
but since these commodities were produced by hand, the increase 
was slow. In last analysis, therefore, the economic civiliza- 
tion of this stage rested upon the petty village industry. Com- 
mercial prosperity and agricultural wealth were still associated 
with the prevalence of the small workman and the village 
economy. 

This stage, it is true, assumes different phases. In some 
places agricultural prosperity predominated and the landowner 
was supreme; in others, like the Hansa towns, we find busy 
marts of wholesale trade, and the predominance of the aristo- 
cratic commercial families; in still others we find the centres 
of manufacture and the political mastery of the craft guilds. 
In all cases, however, we have the typical characteristics, — the 
small trader, the petty workman and the local economy. The 
large landowner sold his produce in the neighboring village 
market and drew thence his articles of consumption, outside 
of simple food. The merchant prince may have traded with 

^'. distant lands, but the great bulk of the transactions was local, 
and the business of the national and international fairs was 
restricted to comparatively few articles. Most of what the 
workman produced was made to order for the local market. 
V The village or town was the unit; the foreigner was the man 
who came from a different town, not necessarily from a different 
country. 

This stage of economic life lasted in Europe for several cen- 
turies. Various causes conspired first to modify and finally 
to destroy it. The chief factor was undoubtedly the accumu- 
lation of wealth caused by the discovery of the new world and 

'"' the opening up of the all-sea trade routes to the East. The 
discovery of immense sums of precious metal in America and the 
prodigious impetus given to commerce both East and West 



§ ^t] Industrial Economy 8 1 

produced a heaping up of riches which were now applied on a 
large scale to further production in industry, and which gradually- 
changed the character of all economic life. This accumulation 
of wealth, applied to industry, formed what came to be known 
as industrial capital, and there was thus ushered in the third 

stag^.,^-^^ 

33. Capitalist or Industrial Economy 

(> /The characteristic feature of this stage is the appearance of 
--.papital on a large scale, applied in industry. With capital, 
there naturally came the capitalist, the owner of the capital, 
the employer of labor force and the director of industrial enter- 
prise. In the isolated stage we noticed a unity pervading the 
whole economic process; in the local and handicraft stage we 
saw that the unity was confined to production; in the capitalist 
stage production itself is split up. At first, as in seventeenth 
and early eighteenth-century England, the capitalist makes 
his appearance at the beginning or end of the productive process: 
he buys the raw material wholesale, or perhaps even disposes of 
the finished product at wholesale, leaving the remainder of the 
process in the hands of the independent workman. Somewhat 
later the capitalist acquires the working premises and finally the 
technical means of production. The workshop becomes the fac- 
. tory, the tools are replaced by machines, and the workman be- 
comes the factory hand. In the meantime the various parts of the 
process become so important that each separate stage falls into 
the hands of distinct groups of capitalists, each of them resting 
on the fundamental class of factory owners. Thus the supply 
of raw material, the provision of plant and factory, as well as the 
getting of the finished product to the consumer, call into exist- 
ence distinct classes of capitalists for each step in the process. 
Finally the power of capital becomes so enormous that in some 
industries we find a movement toward integration, and the same 
capitalists, now associated into a single group, gradually acquire 
control of the entire process, from the extraction of the raw 
material to the ultimate disposition of the finished product 
6 



82 Economic Stages [§ ^;^ 

to the consumer. Thus industrial society comes to be organized 
on its present compHcated basis. 

Production is now no longer to order in small quantities, as 
in the previous economic stage, but large stocks are accumulated 

"' to be disposed of when the market is favorable, or large plants 
are erected to fill anticipated large orders. The leisurely 
methods of the old system, regulated more or less by custom, 
give way to an intense competition which makes itself felt in 
every nook and corner of industrial society. The last vestige 

'^*^-. of barter transaction disappears, and money everywhere forms 
the link between exchanges. Credit outgrows its primitive 
forms of mere personal assistance and becomes an integral part 
of production and exchange. The desire to employ capital 
lucratively leads to the attempt to economize labor force, and 
brings about the invention of new machinery. The prodigious 
cheapening of production converts luxuries into necessities 
and widens the consuming power of the people. The multi- 
plication of wants brings new industries into existence, and finally 
gives more employment at increasing wages to the laborer. 
At the same time the enormous power of capital and the sep- 
aration of society into industrial classes create new and difficult 
problems. 
, 1 An important result of the capitalist stage is the supplanting. 

^ /of the local unit by the nation. Production and consumption 
Ho longer take place within the local boundaries, but what is 
produced in one district is often consumed in another. The 

^ local economy broadens into a national economy. The larger 
economic interests now require protection through the forma- 
tion of broader and stronger political units. Thus the petty 
feudal principalities disappear and the modern national states 
are born. Town is no longer arrayed against town, the free- 
man or burgess gives way to the citizen of the state; the 
foreigner is now the man from a different nation, not from a 
different village. In the early stages of capitalistic develop- 
ment the nations oppose each other as the towns had previously 



^ T^^] Industrial Economy 83 

done, and this keen national competition leads to much good, \>^ 
although not unmixed with evil. 

More recently still, the further application of capitalist 
methods, the improvements in transportation and communica- 
tion, coupled with the growth of modern speculation, tend to 
produce a world market for most products, and the perturba- 
tions of trade are quickly transmitted from country to country. 
We might thus even be tempted to speak of an international 
rather than a national economy. But although the signs are 
not wanting that the ultimate outcome will be the creation of 
such a world economy, it must not be overlooked that the 
economic unit to-day is still the nation, and that the national 
standpoint is being only slowly transformed by universal or 
international considerations. 

The capitalist stage is also called the industrial stage, because 
industry in the narrower sense is the chief occupation. In the 
first stage agriculture was the well-nigh exclusive form, in the 
second stage prosperity rested largely on trade, in this stage 
agriculture and trade alike step into the background. All 
products of course still come ultimately from the soil; but an 
ever-increasing quantity of wealth consists of products several 
degrees removed from the soil. Production of wealth to-day — 
means more and more the creation of finished products. Com- 
merce, again, is still of great importance; but commerce is now ' 
primarily the handmaid to industry rather than to agriculture. 
Not only has the moneyed interest appeared as a rival of the 
landed interest, but the moneyed interest itself has become 
intimately bound up with industry. The great fortunes are 
gained to-day not in agriculture, nor even in commerce, but in i/ 
industry. The typical rich man in the first economic stage 
is represented by the feudal landlord or the plantation owner; 
in the second stage by the merchant princes, such as the Medici 
and the Fugger; in the third stage by the Carnegies and the 
Rockefellers. Agriculture and commerce have been trans- 
formed by the application of capital and of machine methods. 



84 Economic Stages [§ 33 

The most prosperous condition and the widest diffusion of 
power, of culture and of civiHzation are found in industrial 
rather than in agricultural nations. 

Some countries, like China, were not touched by this move- 
ment, because of the pohcy of commercial exclusion. So that 
China is still in the village economy, stage. Other countries, 
like Japan, were brought into the new movement but a few 
decades ago, and are now in a process of rapid transition. Still 
other places, like some of the backward sections of Europe and 
America, lag behind in the movement. In classic antiquity, 
as we have seen, the second stage was not reached for a long 
time. Even, however, where commerce developed on a large 
scale and the civic centres flourished, industry was still of a 
petty, handicraft character, and the existence of slavery coupled 
with the absence of any such revolution in the world's trade as 
occurred at the close of the middle ages prevented both Greece 
and Rome from entering upon the later stages of the capitalistic 
era. Capital in classic antiquity was primarily commercial 
capital; capital in modern times is predominantly industrial 
capital. 



CHAPTER VI 
THE HISTORICAL FORMS OF BUSINESS ENTERPRISE 

34. References 

C. Biicher, Industrial Evolution (1901), ch. iv; Ashley and Cunningham 
(as in § 27); T. Veblen, Theory of Business Enterprise (1904), chs. ii, iii; 
J. A. Hobson, Evolution of Modern Capitalism (191 7), chs. iii, iv; G. E. 
Howard, History of Matrimonial Institutions (3 vols., 1904), I, chs. i-iv; 
H. S. Maine, Ancient Law (1880), ch. ix; and Early History of Institu- 
tions (1880), ch. iii; C. Gross, The Gild Merchant (1890); W. R. Scott, 
The Constitution and Finances of English, Scottish and Irish Joint Stock 
Companies (3 vols., 1910-1912); A. Toynbee, The Industrial Revolution 
(1884); G. Unwin, Industrial Organization in the Sixteenth and Seven- 
teenth Centuries (1904); R. M. Trypn, Household Manufactures in the 
U. S., 1640-1860 (1917); S. J. Chapman, The Lancashire Cotton In- 
dustry (1904); A. W. Calhoun, A Social History of the American Family 
(3 vols., 1917-1919); H. Pirenne, Belgian Democracy (1915). 

35. Primitive Economic Activity — The Clan 

Business originally meant the ''being busy" for a mere live- 
lihood; it now means being busy for profit. In the same way 
business enterprise originally denoted any organized form of 
economic activity; it has now come to involve the idea of 
making a profit or securing a surplus. "Enterprise" is the 
Romanic form of the Teutonic "undertaking." When we 
undertake to secure any form of wealth, we have economic 
activity; when we undertake to secure profits through some 
organized activity, we have an undertaking or enterprise. 

With the immense growth of such activities in modern times 
increased importance is attached to the organizer. Not so long 
ago we called the head of the undertaking the "undertaker"; 
nowadays with the restriction of the term to a particular class 
of undertakings we have come to call him the head of the enter- 
prise, or the enterpreneur. 

85 



86 Historical Forms of Business [§ 35 

The earliest kinds of business undertakings are outgrowths 
of the family. The family itself, however, is the result of a 
long evolution. We have seen that our savage ancestors roamed 
about in small hordes or packs of a few dozen individuals, the 
numbers being dependent chiefly on the possibility of securing 
available food supplies from the berries and nuts, the chase 
and the waters. After the breakdown of the original monopoly 
of sexual relations on the part of the leader of the pack, the en- 
suing promiscuous methods of pairing gradually gave way to 
more or less permanent forms of marriage, in which kinship 
was counted through the mother. For amid such conditions 
of group, rather than individual, marriage relations it was indeed 
a wise child who knew its own father. These consanguine 
groups or collections of hordes which we meet almost everywhere 
at the dawn of history are known as clans (or, to use the Roman 
term, gentes), and, from the fact that their members usually trace 
their kinship through the mother, are called uterine or maternal 
clans. In some cases where the primitive agriculture or hoe- 
culture carried on by the women assumed great proportions, 
or where we find an increasing significance attached to the do- 
mestic arts, like weaving and baking, the social importance of 
the female was reinforced by still stronger economic reasons, 
and we encounter a system of society known as the matriarchate, 
— the government by women. While the matriarchal system, 
however, is occasional, the maternal society based on the uterine 
clan is well-nigh universal. 

Of the characteristics of this early gentile or clan society 
there is room to say only a few words. Of a family in the 
modern sense there was no trace, further than the temporary 
living together of the mother and the very young children. 
The only recognized relationship was kinship or membership 
in the clan. Owing in a large measure to the survival of the 
primal law of sexual monopoly of the head of the original horde, 
and perhaps also to a recognition of the injurious results of 
inbreeding, the custom arose of contracting marriage, or rather 



§ 36] The Family 87 

of entering into connubial relations, outside of the clan; and 
thus there developed one of the most rigid rules of primitive 
society, the system of exogamy, or the prohibition of marriage 
between members of the same clan, as constituting incest. Each 
clan traced its descent from, and often took the name of, some 
mythical ancestor, — generally an animal or plant. This to- 
tem, as it was called, became sacred and was soon protected 
by a system of "taboo" or rehgious prohibition. The origin 
of the totem worship is still shrouded in mystery, but is probably 
to be sought in economic reasons, — the totem being at first 
the chief source of food supply which afterwards became so 
useful for purposes of barter that its consumption by members 
of the clan was forbidden. Where conditions were favorable 
to an increase of population the clans, although always pre- 
serving their own integrity, developed into the wider groups of 
phratries and of tribes, all of them connected, however remotely, 
by blood relationship. The clans, and in some cases the tribal 
groups, were the centres for common sports, celebrations and 
worship, and in the clan or tribal customs we find the germ of 
what afterwards developed into both law and morals. 

36. The Family 

The decay of the clan or gentile society was again due largely 
to economic causes. Where conditions favored the growth 
of the pastoral system, private property in flocks and herds 
arose, and the paramount position of the father as the bread- 
winner and the defender of the property was recognized. Where 
the hunting and root-grubbing stage was supplanted by a devel- 
oped agriculture, the labor of the man in tilling the soil, con- 
structing the house and maintaining the patrimony became of 
signal importance. The male is now the chief factor in the 
economic process, and we accordingly find the patriarchal 
family. Famulus is the Latin for servant or slave: all the 
members of the new family group are the servants of the father. 
The family relations are primarily property relations. The 



88 Historical Forms of Business [§ 36 

father owns the land, the flocks, the wife or wives, the children, 
the slaves, and exercises scarcely less authority over the other 
relatives that form a part of the family group. The father gives 
his name to the wife and children, and the patrimony is handed 
down from family head to family head. We now find that 
marriage by capture gives way to marriage by purchase; and 
the group union of early gentile society is succeeded by the 
polygamy and finally the monogamy of the patriarchal head. 
The unity of this new family group is far closer and its disciphne 
far more rigorous than that of the clan, and the recognition of 
these intimate economic relations leads to the growth of all those 
finer filial and fraternal ties which are the nursery of ethical 
progress. For a time the forms of the old gentile society are 
still preserved amid the newer and more vigorous patriarchal 
system, either under an agricultural regime, as in the recorded 
beginnings of Greek and Roman history, or under pastoral 
conditions, as in the story of the early biblical patriarchs. But 
with the undermining of the economic foundations of the clan 
system the whole structure of gentile society crumbled. Where- 
ever territorial relations based on the community of wider 
economic interests replaced the old ties of blood relationship 
within the clan, tribal society developed into political society 
and thus led to the origin of the state and of organized gov- 
ernment. 

In Judaea, Greece and Rome, as in all countries that had to 
work out their own civilization, this gradual evolution can be 
clearly discerned. In other cases where a lower civilization 
was suddenly brought into contact with a higher one, the steps 
are often less gradual. Thus the contact of the Teutonic 
tribes with Rome engendered a rapid transition from gentile 
to political society, but with a decided abbreviation of the 
patriarchal period. Much the same is true of the influence 
of the English on the Irish septs, which lasted well into the 
middle ages, and on the Scottish clans, which finally disappeared 
as a power only a century or two ago. 



§ 36] ' The Family 89 

The patriarchal family was thus primarily an economic 
product. The family became and remained the basis of social 
and political life. With the growth of industry and commerce 
and the opportunity for independent activity on the part of 
the various members, the old family group split up and was 
contracted into the family of modern times with its smaller 
and more immediate circle. Finally, the most recent devel- 
opment of economic life with its freedom and its system of 
competition has powerfully contributed to a still further loosen- 
ing of the family discipline; woman has emancipated herself, 
divorce has become frequent, the age of the effective inde- 
pendence of the children has been continually pushed further 
back. Thus there have been ushered in all the ethical and 
social problems of modern family life, a discussion of which 
transcends the scope of an economic treatise. 

The family thus constitutes the earliest form of business 
undertaking only in the original sense of an organization to 
secure a competence rather than a surplus. That is to say, 
production was carried on within the family, by the family, for 
the family; both producers and consumers were members of 
the family; each worked for all; each consumed the products 
of all. Yet the first attempts at business enterprise in the 
modern sense of an organization for gain, of producing for a 
market, are associated with the later developments of the family 
groups. The great slave plantations of the Roman Republic, 
for instance, were distinct business enterprises. The larger 
family groups which became the village communities of the 
early middle ages and which, when subjected to an overlord, 
developed into the manorial system were occasionally, at least 
in part, business enterprises, as in England after the period of 
the early enclosures. We find examples of this co-operative 
family or group enterprise not only in agriculture, but also in 
commerce, as in the trade transactions of the mediaeval com- 
munes, and even in industry, as in the Russian artels or co- 
operative groups of laborers that have survived to this day 



90 Historical Forms of Business [§ 37 

In its essence, however, the family was not well fitted for business, 
in the sense of profit-making; and with the increasing importance 
of the competitive life the abler individuals who cut themselves 
loose from the family group forged to the front. With the greater 
conservatism which always marks the tillers of the soil we find 
this process slower in agriculture than in industry and commerce. 
It is accordingly in these latter directions that we must first 
look for the more developed forms of business enterprise. 

37. Help or Hire System 

Where industry develops beyond the capacity of the family 
group and where the conditions are not favorable to the growth 
of slavery, we find the beginnings of industrial assistance from 
outside sources. The independent laborer who roves from 
house to house and from place to place does more of the 
work of the household. Carpenters, cobblers, glaziers, tin- 
smiths, masons, seamstresses, — these represent a few of the 
occupations conducted in this roving fashion. The itinerant 
workman receives a compensation for his services and often 
becomes for the time being a member of the family. This 
custom survives even to-day, not only in the New England 
institution which bears the significant name of "help" (even 
though the service has become somewhat more permanent), 
but also in the temporary assistance given to our Western 
farmers at harvest time by the "hired man." This system 
can thus best be termed the help or hire system.^ It is found 
in the early history of almost every society, and those familiar 
with the rural communities of Switzerland and Scandinavia 
will recognize it as the prevalent form to-day. 

In its essence, however, the help system is an intermediate 
and transitional form. The important factor is still the family 
group; the consumer furnishes as before the raw materials 

^ The term " wage-work," used by Biicher and his translator, Indus- 
trial Evolution, p. 162, is ill chosen, because the term wage-earner 
inevitably brings to mind the modern factory system. 



§ 38] Handicraft System 9 1 

and receives in return the finished product, the workman sup- 
plying the labor force and sometimes the tools. Gradually 
the change assumes a more rapid pace. The smaller house- 
holds find that they need outside help more frequently but less 
intensively, and the larger family groups find it profitable to set 
some of their superfluous assistants to work for others. The cus- 
tom arises of the consumer going to the workman rather than 
the workman coming to the consumer. Thus the occupations 
of the village blacksmith, the miller, and even the baker and 
weaver become settled trades. The itinerant workman acquires 
greater permanence, and from assistants the laborers now evolve 
into a class independent of the family group. When this step 
is reached, we have what is known as the handicraft system. 

38. Handicraft System 

Under this system the artisan is independent. He no 
longer works in the house of the consumer. He occupies 
his own house, he goes to market to purchase his raw mate- 
rials, he works up the raw material in his own home with his 
own tools and he sells the finished product to the consumer 
in his own shop. We no longer have production for the 
family, as in the family system; we no longer have the raw 
material and the finished product belonging to the consumer, 
as in the help system. Every phase in the process down to 
the sale of the final commodity is in the hands of the workman 
himself. The workman or craftsman, moreover, finishes every- 
thing by hand, and it is for this reason that we speak of the 
handicraft system. This does not mean that things were not 
previously and even subsequently made by hand, but calls 
attention to the fact that the distinguishing mark is the grow- 
ing importance of industry and the rise of an independent class 
of workmen, who conduct business enterprises by themselves. 
Since the producer makes to order for a special customer, 
the system is also sometimes called the custom system, — a 
term still surviving in the custom-tailor of to-day. 



92 Historical Forms of Business [§ 38 

In the middle ages the workmen gradually banded them- 
selves together by trades into compact organizations known as 
guilds or crafts. Historically the system has therefore come 
to be known as the guild system. The guilds, however, were 
a result rather than a cause; and in many parts of the world 
we find the handicraft system without the guilds. Under 
the guild system every workman might ultimately look forward 
to membership. Starting in as an apprentice, he spent a few 
additional years as journeyman, and when he had finally 
mastered all the details of the trade, he was admitted as 
master craftsman. To use modern terms, which had no 
meaning then, he was at once employer and workman, capital- 
ist and laborer. The modern differentiation of classes was 
unknown. At the height of their power the guilds often se- 
cured a political domination. In many countries they came 
to be virtually identical with the townsmen; the division of 
labor between land and town assumed a sharply defined form, 
and the manor became more and more the simple purveyor 
of raw material for the guild. Just as the family system of 
industry corresponds to the typical isolated household economy, 
so the guild or handicraft system corresponds to the typical 
trade or local economy. 

The guild system characterized the industrial life of Europe 
for several centuries after the Crusades. With the increase of 
wealth, however, a twofold process went on. The guilds grew 
more grasping and exclusive, until they became monopolistic 
bodies, proving a drag upon industry instead of a help. 
Membership was confined to a select few whose right to 
practise the trade was inherited, and the mass of the workmen 
could no longer look forward to participation in its benefits. 
Newer industries started wherever they could, in independence 
of the old crafts. Secondly, and more important, as the richer 
craftsmen amassed wealth, they as well as the larger traders 
desired to put it to productive uses. Thus, as we have seen, 
there developed a true industrial capital which could not well 



§ 39] Domestic System g^ 

find employment within the limits of the old system. The 
guild or handicraft system slowly decayed, and there was 
ushered in the next stage, known as the domestic system, 

39. Domestic System 

Here for the first time we find a line drawn between the 
capitalist employer and the workman. In the help system 
there was also an employer, but he was himself both workman 
and consumer. In the handicraft system the employer was no 
longer the consumer, but was still, in part at least, the workman. 
In the domestic system the employer and the workman are dif- 
ferentiated. The method of sale of the finished product, more- 
over, is another point which distinguishes the domestic system 
not only from the help system but also from the handicraft 
system. In the help system the product is not sold at all; it 
is consumed by the employer. In the handicraft system, where 
production is carried on on a small scale and to order, the 
commodity is sold directly by the workman to the consumer. 
Now, however, where capital has made production on a larger 
scale possible, the market is so widened that the individual 
workman is no longer able to control the means or to devise 
the machinery for placing the products on the market. The 
capitalist alone can do this. 

The essence of the domestic system consists in the fact that 
while the workman still owns his tools and conducts the work 
in his own home, often with the aid of his family and in con- 
nection with some agricultural activity, he no longer disposes 
of the finished product. In most cases, in fact, he no longer 
buys or provides the raw material; for the same capitalist who 
disposes of the product also finds it possible to purchase the 
raw material in larger quantities. The division of labor goes a 
step farther than in the guild system. Not only does one 
class produce the raw material, and another the commodity; 
but the production of the commodity itself is now divided 
between two classes, the one buying the materials and market- 



94 Historical Forms of Business [§ 39 

ing the goods, the other furnishing the productive power or 
manual labor, the tools and the work place. 

The term domestic system is not a happy one, for under the 
handicraft or guild system the laborer also worked in his own 
home. It is used, however, to distinguish this form of capitalistic 
enterprise from its successor where the laborer no longer works 
at home. Again, under the domestic system the laborer still 
works by hand, but since he is no longer in control of the entire 
process of production we distinguish it from the handicraft sys- 
tem. The term that was now applied to the domestic workman is 
manufacturer, the maker by hand (manus, facere) . Sometimes, 
instead of domestic or home work, we speak of commission work. 
The capitalist owner of a commodity commits it to another in- 
dependent individual to be worked up and returned to him. In 
the clothing trade to-day we still distinguish between custom 
work (the old handicraft system) and commission work. 

The domestic system, which developed during the seven- 
teenth century and reached its chmax in England in the 
eighteenth, was modified with the immixture of capital into the 
successive stages of business. The most important change 
was due to the desire to economize in production and to ap- 
ply capital lucratively through the invention of labor-saving 
devices, or machines, which substituted mechanical power for 
human labor. In the textile industries, the period before 
1770 marks the early experiments, the period 1 770-1 790 the 
development of the great mechanical inventions, the period 
1 790-1830 the application of steam power, and the period 
after 1830 the widening of the market through the railway and 
the steamship.^ The other industries soon followed, and there 
was thus inaugurated what is termed the factory system. 

iThe important dates are: Kay's flying shuttle, 1738; Hargreave's 
spinning jenny, 1764; Arkwright's spinning frame, 1768; Crompton's 
mule, 1779; Cartwright's power loom, 1785; Watt and Boulton's steam- 
engine, 1785. 



§ 4o] Factory System g^ 

40. Factory System 

This system is the one under which the modern world lives. 
Here the capitalist employer not only provides the raw mate- 
rial and disposes of the finished product, but also controls the 
intermediate process. The machinery is so costly as to be 
beyond the reach of the workman; and since the machines are 
the property of the employer the building in which production 
is carried on must also belong to him and is called the factory. 
The laborer is not his own master, as in the handicraft system, 
he no longer owns the tools and the workshop, as in the 
domestic system: all that he does is to provide the human 
labor force which is applied through machines and in work- 
places owned by the capitalist employer. The stupendous in- 
crease of production which is thus rendered possible reacts 
upon the laborer, both as producer and as consumer. Popu- 
lation increases enormously, and there is a continual drift from 
the country to the city. Industrial society receives its modern 
shape, and the social income is divided into the rent of the 
landowner, the wages of the laborer, the interest of the capi- 
tahst and the profits of the entrepreneur. "Manufacturer" 
no longer means the handworker, but the individual who em- 
ploys others to work for him. The development of capital 
leads to keener competition and speculation, new classes of 
capitalist middle-men arise and the machinery of credit and 
exchange is transformed. The predominance of the industrial 
capitahst employer is so pronounced as to give to the whole 
form of business enterprise the name factory system. 

So markedly different is this from any of its predecessors 
that the process which brought it about is commonly termed 
the Industrial Revolution. If by revolution, however, we mean 
a sudden and complete overturning of the old, the name is ill 
chosen. For the process was a gradual one. It took several 
decades for the transition in the English textile industries to be 
consummated, and in the other occupations the supplanting of 



96 Historical Forms of Business [§ 41 

the domestic by the factory system proceeded step by step 
during the ninteenth century. ^ Outside of England, the 
movement came later and more slowly, while even in England 
there are still a few trades, like those of the glass-workers, the 
cutlers and the chain-makers, in which the factory system has 
made only slight inroads. 

It must not be thought that each of these forms of enterprise 
is marked off from the others by sharp lines. In every stage 
we notice survivals. The family system is still found in the 
outlying regions of almost all countries where modern ideas 
have not completely penetrated, as, for instance, the Southern 
Appalachian mountains; the help system survives in various 
kinds of domestic and other service; the handicraft method is 
typified in the cobbler or custom tailor; the domestic system 
plays a considerable role in the hand-loom weavers of Europe 
and the sweat-shops of modern cities with their commission 
work in the clothing trade. The economic life of a people, 
however, is characterized by the type forms, not by the sur- 
vivals of a preceding system. Modern business enterprise is 
based to an overwhelming degree on the factory system. 

41. Associated and Corporate Enterprise 

We have thus far discussed the growth of business enter- 
prise from the point of view of the differentiation of the entre- 
preneur. We have now to treat it briefly from the point of 
view of associated production. Here we can trace four stages, 
— enterprises carried on by individuals, by partnerships, by 
corporations, by trusts. 

(i) We have seen that while the family was the earHest form 
of associated activity it was not well suited to the keen eco- 
nomic struggles inseparable from business life. Business enter- 
prise really begins with the business man, and the business man, 
now as then, is to a large extent born, not made. Sagacity, 
boldness, good judgment and administrative ability have always 
been the mental equipment of the successful merchant. To 



§ 4i] Corporate Enterprise 97 

the extent that the individual has possessed these quaUties, he 
has forged ahead. As business enterprises increased, however, 
the individual often found himself unable to cope with the 
situation single-handed. He therefore associated himself with 
others who possessed some of the qualities which he lacked. 

(2) The partnership was a device to strengthen enterprise at 
its weak points. It meant the association of various kinds of 
ability, and often of capital and ability, and multiplied to 
that extent the economic efficiency of the unit. The partner- 
ship, however, has decided limitations. The personal relation 
between the partners and the need of implicit confidence in 
each other necessarily restrict it to a few individuals. As 
soon as the business calls for the employment of a capital 
beyond the means or the desires of a few partners, a new form 
of enterprise is needed. This is supplied by the corporation. 

(3) Although according to the recent researches of Deloume 
and Weber the commercial corporation probably existed in 
the later centuries of the Roman Republic, in its modern 
shape it dates from the early mediaeval Italian cities. The 
earliest form was that of a so-called "bank," individuals 
associating their capital to form a joint stock, loaning it to the 
government on a pledge of certain revenues, and participating 
in the profits according to their holdings. Thus the beginnings 
of public credit and of corporate enterprise are found in- 
timately associated. The next important development of the 
joint-stock principle was in the trading companies of the six- 
teenth century, which were at first mere temporary associations 
for the purposes of a single voyage, but which gradually 
assumed a more permanent form. It was not, however, until 
the predominance of industrial over commercial capital in the 
nineteenth century that we find the immense expansion of cor- 
porate enterprise which marks modern life. 

The economic advantages of corporations are threefold, — 
joint stock, limited liability, perpetual life. Through the 
device of the corporate security, the number of the investors 
7 



98 Historical Forms of Business [§ 41 

may be multiplied without limit. Every stockholder has a 
voice in the enterprise in proportion to his investment. He 
is liable for the debts or losses only to the limit of his own 
share. Modern states have been slow to recognize this prin- 
ciple of limited liability, but it now forms the very heart of the 
system. It removes the apprehension and distrust which lay 
at the basis of the overgrown partnership and the unlimited 
liability company. It has facilitated the marketing and trans- 
fer of the shares and has rendered possible the vast accumu- 
lation and the minute dissemination of capital. Finally, the 
corporation, unlike the individual, never dies until the business is 
liquidated; the shareholders disappear, the shares remain. It 
has all the advantages of permanence and stability; it can plan 
for the morrow as well as for to-day, and by proper choice and 
renewal of its board of directors it can continually command 
the highest ability and adjust itself to altered needs. 

As against these advantages there are undeniable short- 
comings. The "corporation problem" touches the threefold 
relation of the corporation to the investors, the employees and 
the public. The protection of the minority stockholders and 
of the ''innocent investors," the mutual relation of the stock- 
holder and the bondholder, and the enforcement of real 
trusteeship on the part of the directors are matters that still 
remain to be adjusted. The conditions of employment are 
often modified by what is termed the substitution of the cash- 
nexus for the old-time personal bonds between employer and 
employee. The corporation proverbially has no soul. Finally, 
as against the public the corporation will often do what indi- 
viduals as such would shrink from doing. It is not a light 
task to raise the plane of corporate morality to that of individ- 
ual business ethics. With all its shortcomings, however, the 
corporation is indispensable to modern business activity. 
Without it the world would revert to a more primitive state of 
economic well-being, and would virtually renounce the inesti- 
mable benefits of the best utilization of capital. 



§ 4i] Corporate Enterprise 99 

(4) Where the advantages of united capital on a gigantic 
scale become still more apparent, the associations of individuals 
into corporations are further developed into unions between 
corporations. These at first assume the form of more or less 
loose agreements, fixing prices or conditions of production. 
A further stage is reached when receipts are pooled, and the 
unions adopt the name of pools. A still closer association is 
effected when the enterprises are united under a common 
head, and known as trusts, because originally the co-operating 
corporations put their respective holdings of stock into the 
hands of trustees, who were to direct the joint enterprise. 
Where, as in the United States, this particular method of union 
has been declared illegal, the same results have been reached 
by forming a new and independent corporation. What are 
to-day popularly called trusts are simply huge corporations. 
The trust problem is therefore in many respects a phase of the 
corporate problem. From this point of view, as we shall see 
hereafter, the so-called trust is as much a natural development 
from the small corporation as the corporation itself is an out- 
growth of the business partnership, or the partnership an evo- 
lution of individual activity. The reasons and limits of this 
development will be studied below. It is clear, however, that 
with the growth and differentiation of capital, under the pro- 
digious development of modern industry, the forms of business 
enterprise are steadily becoming more intricate. 



CHAPTER VII 
ECONOMIC DEVELOPMENT OF THE UNITED STATES 

42. References 

G. S. Callender, Selections from the Economic History of the United States 
(1909); E. L. Bogart, Economic History of the United States, 2d ed., 191 2; 
K. Coman, Industrial History of the United States (new ed., 1911); G. L. 
Beer, The Commercial Policy of England toward the American Colonies 
(1893), The Origins of the British Colonial System (1907), The Old Colonial 
System, 1660-17 54 (4 vols., 1912-1915), and British Colonial Policy, 
1754-1765 (1908); W. E. Weeden, Economic and Social History of New 
England (2 vols., 1890); A. B. Hart (ed.), Social and Economic Forces in 
American History (1914); Johnson, van Metre, Huebner and Hanchett, 
History of Domestic and Foreign Commerce of the United States (191 5); 
V. S.Clark, History of Manufactures in the United States (1916); E. D. 
Fite, Social and Industrial Conditions during the Civil War (19 10); 
W. I. King, The Wealth and Income of the People of the United States 
(1915). 

43. Early Period of American Economic Life 

The United States is a particularly interesting illustration of 
economic development, because of its rapid pace and because 
of the co-existence of different phases. At the beginning the 
striking fact, as in all colonies, was the contact of an intellec- 
tually advanced population with primitive economic conditions. 
The white man brought with him the civilization of the old 
world, and was saved the necessity of the painful evolution of 
centuries. Possessing the use of perfected tools, the concep- 
tion of private property, the institutions of government and 
of the family, it was impossible for him to revert to the hunt- 
ing or nomadic stage. The impracticability of converting the 
savage at once into a husbandman led to the disappearance of 
the red man before the economic onset of the colonist. Yet 

• 100 



§ 43] Early Period i o i 

in the presence of a vast and unsubjugated expanse of nature 
the immigrant had to start afresh and to unlearn many a lesson 
of his former home. Coming from a trade or local economy, 
he was thrown largely upon his own resources in a com- 
paratively isolated economy. Agriculture again became the 
predominant occupation: an agriculture, however, now based 
not upon feudalism, but, in the North at least, upon the 
independent farmer. The attempts to introduce into the 
Middle states the types of mediaeval land relations could not 
be permanently successful; and only in the South, for obvious 
reasons, was it possible to reintroduce the primitive system of 
slavery. 

The typical American was the backwoodsman, using his gun 
but wielding his axe, and depending primarily upon his hoe 
and plough. Step by step he cleared the forest and cultivated 
the soil, and in this continually renewed contest with nature 
hammered out those sturdy qualities of mind and heart which 
soon enabled him to add political to economic independence. 
The frontier is the home of democracy, because the frontier is 
the home of economic equality. As it was gradually pushed 
inland the communities which had left the frontier stage behind 
them developed from the family system of industry, through 
the help, into the handicraft and domestic system. The guilds 
which were fast decaying in the old world found no foothold 
in the new; and as the villages and towns sprang up the in- 
significant industry was carried on by the independent handi- 
craftsman. Everywhere, moreover, agriculture was the chief 
source of wealth. 

In the South the increasing accumulations of wealth were 
put into more land and more capital. In the Middle states, 
and a little later in the Northern states, the new wealth took 
the form of commercial capital; and as it was gradually pushed 
into industry the domestic system arose. At the time of the 
Revolution and down to the war of 1812 the ''manufacturer" 
was still the manual workman, and the whole industrial devel- 



I02 Economic Development [§44 

opment was insignificant in the extreme. The war with Eng- 
land and the years of unrest which preceded it brought about 
a shifting of capital from commercial to industrial pursuits, 
and the factory system was fairly inaugurated, in a few of the 
textile industries at least. Under the fostering care of the 
''American system," as the new protective poHcy was called, 
the industries throve, — although we must not exaggerate the 
influence of legislation upon what would at all events have 
been the natural, even if slow, evolution of industrial capital. 
For this natural growth in the North and East was due to the 
pushing of the frontier beyond the AUeghanies, and to the con- 
sequent accumulation of agricultural profits which soon took 
the form of industrial capital under the impetus of the demand 
of an increasing population for manufactured products. Nor 
was this growth checked by the reversal of the tariff policy and 
the adoption, during the thirties to the fifties, first of the Com- 
promise, and then of the so-called Free Trade systems, dictated 
by the manifest interests of the pohtically dominant South. 
The South, as the exporter of cotton and the importer of 
manufactured products, had clearly no interest in the develop- 
ment of industrial, as over against commercial or agricultural, 
1 capital. 

44. Growth of American Industry in the Nineteenth Century 

The growth of prosperity during the middle of the nine- 
teenth century was due primarily to other causes, three in 
number: (i) the rich valleys of the Mississippi and its tribu- 
taries were reached by the tide of immigration; (2) the aboli- 
tion of the corn laws in England opened a vast and profitable 
outlet for the increasing yield of wheat; (3) the discovery of 
gold in California furnished an immense treasury of mineral 
wealth. There was thus repeated on a large scale what had 
occurred in a smaller way a generation earher. This conver- 
sion of agricultural and mineral wealth into industrial capital 
assumed, however, a slightly different form. Although the 



M 



§44] Recent Growth 103 

textile and iron industries now supplied a larger output for the 
increasing demand of a quickly growing population, the chief 
need and the most lucrative employment of capital was associ- 
ated with the development of modern transportation methods. 
The railroad becomes the most striking form of corporate en- 
terprise. Up to the middle of the century the few corpora- 
tions — chiefly banks, turnpikes, canals and railways — were 
compelled to take out separate charters. Now under general 
incorporation laws the railroads multiplied and soon brought 
in their wake all kinds of industrial enterprises. From this 
time on the country was fairly launched on the wide sea of 
corporate activity. 

The agitation which -culminated in the civil war was at 
bottom the political expression of an economic antagonism 
between two divergent systems. The one was based on agri- 
culture, and heaped up its wealth in the transition forms from 
an isolated to a trade economy resting on slavery. The other 
had but just entered on the stage of the capitalist economy, 
and the influence of the rapidly developing factory system in 
providing a home market for the independent Western farmer 
soon united the economic interests into a compact and self- 
conscious whole. The phenomenal growth of the fifties, which 
menaced the economic preponderance of the South, brought 
the conflict to a head. The South possessed if anything the 
greater statesmen, the more gifted military leaders and the bet> 
ter navy; but when the outlet for its staple crop was stopped 
up by the civil war it died of inanition and fell a victim to 
the economic superiority of its industrially diversified and 
therefore more enduring antagonist. 

It took the South a generation to repair the ravages of the 
desperate conflict, but with the beginning of the new genera- 
tion the inevitable results appear. Here and there in the 
South the march of industrial capitalism is under full swing, 
and the conversion of the handicraft and domestic stages into 
the factory system is proceeding apace. The transition in 



I04 Economic Development [§45 

several of the Southern states is bringing to the front eco- 
nomic and political issues which agitated New England a 
generation or two earlier, and which were fought out in old 
England before the middle of the century. 

In the North the post-bellum period witnessed an acceler- 
ation of the movement which had so auspiciously begun. 
Notwithstanding the great increase of industry in the East, the 
rapid opening up of the far West and the application of capi- 
talist methods to the exchange, and even in part to the produc- 
tion, of farm products so stupendously augmented the output 
that the prosperity of the country still in large measure rested 
on its agricultural wealth. Toward the end of the century, 
however, with the practical exhaustion of the free land which 
enjoyed adequate rainfall, the industrial movement, which had 
been gradually creeping farther west, now furnished a con- 
tinually more lucrative opening for the employment of the fast 
accumulating capital. By 1910 over a third of the entire pop- 
ulation lived in the commercial and industrial centres, and 
almost a half of the exports consisted of manufactures. 

The change in the character of the national production, and 
the transition from agricultural to industrial conditions, are 
illustrated by the tables on page 105. On the table facing 
page 104 will be found the details of the chief products of 
the United States, as well as the most important exports 
of manufactures. On the ■ charts opposite pages 106-107 
and 108-109 will be found statistics of the growth since 1850 
of certain agricultural products and general manufactures. 
It will surprise many to learn that there were in 19.10 nine 
classes of manufactured products each aggregating over half 
a billion of dollars in value of gross product, as against four 
agricultural products and one mineral product. 

45. Recent Development of American Industry 

This vast increase in capital has not only engendered the 
transition to the period of trusts and huge corporations, but 



ANNUAL VALUE OF THE MORE IMPORTANT PRODUCTS 

(IN MILLIONS). 1 
Farm Crops Manufacturers 



I goo 



Corn . . 


. $828 


Hay . . . 


. 484 


Wheat . . 


369 


Cotton. . 


323 


Oats. . . 


217 


Forest Prod'ts no 


Potatoes . 


q8 


Orchard Prod'ts 84 


Tobacco . 


57 


Wool (1901) 


51 


Mineral 


Prod 


Pig Iron . 


260 


Coal. . . 


221 


Copper . . 


98 


Gold. . . 


79 


Silver . . 


76 


Petroleum 


76 



1910 

51524 

748 

695 
820 

385 



91 

72 



439 
628 

145 

100 

28 

131 



Iron and Steel $1,376 

Slaughtering & Meat Packing i ,370 
Foundry & Machine Shop . 
Lumber and Timber . . 
Mens' & Womens' Clothing 
Flouring and Grist Mill . 
Printing and Pubhshing . 
Cotton Manufacturings . 
Boots and Shoes .... 
Woolen Manufacture . . 
Tobacco Manufacture . . 

Cars 

Malt Liquor 

Leather and Leather Goods 
Bread and Bakery . . . 



I9I0 

m 
</> 


M 




Value added « 

by manu- w 

factures ° 


1,376 


$399 


1,370 


169 


1,228 


688 


1,156 


648 


953 


447 


884 


116 


738 


536 


628 


257 


578 


180 


436 


153 


417 


240 


406 


206 


375 


278 


328 


80 


397 


158 



VALUE OF EXPORTS OF MANUFACTURES 
(IN MILLIONS) 



Iron and Steel Manufactures 
Refined Mineral Oil . . 
Copper Manufactures . 
Leather Manufactures . 
Cotton Manufactures . 
Agricultural Implements 

Chemicals 

Wood Manufactures . . 
All Manufactures . . . 
Per cent of Total Exports 



1890 



$26 

45 

2 

12 

ID 

4 
5 
6 

151 
17.9 



1900 



$122 
68 
58 
27 
24 
16 
12 
II 

434 



1910 



^179 
94 

53 
2>^ 
28 
21 

14 
767 

45-0 



1 Arranged from the Twelfth Census of the United States (Vol. VII 
and Abstract), the Statistical Abstract of the United States, and The 
Mineral Resources of the United States. 



§45] 



Recent Growth 



105 



PRODUCTIONS OF THE UNITED STATES 
(IN MILLIONS) 





1850 


1870 


1900 


1910 


Population 

Farm Products . . . 

Minerals 

Manufactures . . . 


23 
not given 

$1,019 


39 

$1,958 
219 

4,232 


76 

$4,717 
1,107 

13,039 


92 

$8,926 

1,771 
20,672 



PERCENTAGE OF EXPORTS OF THE UNITED STATES 





1850 


1875 


1900 


1910 


Foodstuffs 

Crude Materials . . . 
Manufactures 


20.43 
62.26 
17.21 


37-93 
41-31 

20.42 


35-59 
23-75 
32.91 


11-59 
33-09 
44-85 



has emphasized the national and international significance of 
the modern movement. The economic unit in the United 
States is fast becoming a national unit. Industry is no longer 
confined to the old local limits. Commercial interests have 
overstepped the boundaries of any one state. Action by any 
one commonwealth inevitably reacts upon its neighbor. Eco- 
nomic and political methods framed on the old assumption 
that business is local are bound to create injustice and dis- 
satisfaction. Secondly, the transition to a more intensive 
capitalism and the growth of industrial exports mark the 
economic as well as the political maturity of the country. 
The acquisition of Porto Rico and the Philippines is more 
than a mere accident. The foreign market is becoming an 
adjunct to our industry rather than to our agriculture; it 
assumes such importance because our economic welfare, so far 
as it rests upon international trade at all, will be affected more 
and more, not by what the foreigner must have in the shape of 
food, but by what he can be persuaded into wanting in the 
shape of finished products. 




1 06 Economic Development [§ 46 

There is, however, another side of the picture. The United 
States has so rapidly outgrown the swaddHng clothes of its 
infant economic surroundings, and has stepped with such 
giant strides from its youthful social environment to the 
complex conditions of a full-grown industrial society, that the 
development has been most uneven. America presents in 
some respects the most striking contrasts. It is at once the 
youngest and the oldest of economic societies. It is the 
youngest, in the sense that there are still large tracts untouched 
by plough or harrow, awaiting the coming of the first settler and 
needing only irrigation to convert the desert into a garden. It 
is young because there are huge sections, only one step removed 
from the primitive economic stage, under conditions analogous 
to those which the old world faced, many centuries ago. In 
another sense, however, America is not young, but old. No- 
where on the face of the globe has capital been applied to 
productive purposes with such intensity and such energy. 
Nowhere has man's victorious contest with the powers of 
nature been waged with such intelligence and such relentless 
vigor. Nowhere have the captains of industry prosecuted 
their quest for industrial supremacy with such alertness and 
ability. As a consequence, nowhere have the most ad- 
vanced forms of a highly organized, fully differentiated, thor- 
oughly complex industrial organism been evolved with such 
starthng rapidity and such complete success. In the develop- 
ment of these new economic institutions America is leading 
the world and is showing other countries what stages they have 
still to traverse. While the movement toward combination of 
capital has even in Europe made only timid beginnings, it is 
revolutionizing American industry. In this sense America is 
old, — far older than most of its industrial rivals. 

46. Modern Problems of America 

As a result of the forces just described, we are face to face 
with two sets of problems. The one set has its origin in the 



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§46] Modern Problems 107 

newer and less developed sections of the country, and may be 
illustrated by the currency question. This includes far more 
than is implied in the term itself. It involves, in large sections 
of the West and the South, not so much an increase of the 
money supply as a rearrangement of the economic forces and 
a readjustment of the relations of indebtedness to productive 
capacity. With every shifting of the frontier farther westward 
we have had such periodical readjustments. At the very 
beginning of our national life, when the frontier was located in 
western Massachusetts, came the economic outbreak known 
as Shay's Rebellion. A generation later similar causes produced 
on the new frontier the troubles which culminated in the stay- 
laws of Kentucky. When the frontier reached the Middle 
West almost half a century later, the same movement assumed 
the guise of the fiat money craze. Finally, after the lapse of 
another generation, when analogous economic forces worked 
out their result, not only in the frontier life of the West, but 
also amid the primitive economic conditions of large sections 
of the regenerated but as yet undeveloped South, we reach 
the discussion of silver currency which began in the seventies 
and culminated in the nineties. With the disappearance of 
the frontier and the not far distant industrial awakening 
throughout the entire South, it is probable that the money 
question will assume as subordinate a role in the future of the 
United States as it has assumed in the advanced countries of 
Europe. 

On the other hand, the second set of problems that confront 
us is due to the new and complex industrial conditions of the 
more advanced sections. These new conditions have given us 
the corporation problem, the wages problem, the tax problem, 
the colonial problem, the city problem. It is as idle to inveigh 
against the policy of territorial expansion, on the ground that 
such a scheme was not contemplated by Washington, as it 
would be futile to object to the regulation of combinations 
because this also involves a new departure. In the one case, 



io8 Economic Development [§46 

as in the other, economic conditions have arisen which were 
unknown to the fathers, and which require for their solution 
a new analysis and a new method. 

What is pecuHarly confusing, therefore, is the fact that on 
the one hand we have sections where the economic conditions 
are of a primitive type, while on the other hand in numerous 
parts of these sections themselves there have been grafted 
upon the still dominant and persistent primitive stock the 
shoots of the modern industrial type. The newer methods of 
transportation, as well as the modern media of exchange and 
distribution, have superimposed upon the simpHcity of an 
undeveloped agricultural community the complexity of mod- 
ern industrial enterprise. The consequence is that eco- 
nomic conditions of the country are supremely heterogeneous, 
although tending to become homogeneous. Because of this 
contest of the old with the new, we are in many respects still 
groping in the dark, dissatisfied in the more progressive com- 
munities with the survivals of old conditions, and trying to 
discern in the dim light of the future the final expression of 
the newer conditions which are soon to become universal. 



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CHAPTER VIII 

DEVELOPMENT OF ECONOMIC THOUGHT 
47. References 

J. K. Ingram, A History of Political Economy (1915); L. Cossa, A71 
Introduction to the Study of Political Economy (tr, by L. Dyer, 1893); 
L. H. Haney, History of Economic Thought (191 1, 2d ed., 1920); E. Nys, 
Researches in the History of Economics (tr, by Dryhurst, 1899); W. J, 
Ashley, Surveys (1900), 263-309, and English Economic History. I (1888), 
ch, iii, II (1893), ch. vi; G. O'Brien, An Essay on Mediaeval Economic 
Teaching (1920) L L. Price, Short History of Political Economy in Eng- 
land from Adam Smith (1891); E. Cannan, History of Theories of Produc- 
tion (3d ed., 1910), chs. ix x S. N. Patten, Devehpment of English 
Thought (1899), ch. v; C. Gide and C. Rist, A History of Economic Doc- 
trines since the Physiocrats (tr. by Richards, 1914) ; M. Beer, History of 
British Socialism (2 vols, 1919-1920): H Eisenhart, Ges'-hichte der 
Nationalokonomie (2d ed., 1891) ; A. Oncken, Gcsrhichte der N ationalokon- 
omie, I (1902); J. Rambaud, Histoire des Doctrines jSconomiques (1899); 
A. Espinas, Histoire des Doctrines Economiques (1900). 

48. Economic Theory in Classic Antiquity 

It has often been said that economics is a modern science. 
In point of fact, it is only modern economics that is a modern 
science. Every economic stage which has been marked by 
any scientific thinking at all has had its own economic theory. 
The stars indeed moved for aeons before man thought of as- 
tronomy. So economic phenomena existed for centuries be- 
fore any attempt was made to analyze them. Once formulated, 
however, the economic theory of any period is usually nothing 
but the reflex of its economic life. 

The earliest speculation on economic phenomena of which 
we have any knowledge is that of classic antiquity. Prior to 
the Greeks we find only ethical exhortations on social reform 
as among the Oriental nations, or practical treatises on agron- 

109 



I lo Economic Thought [§ 48 

omy as aiiiong the Carthaginians. But both Aristotle and 
Xenophon, to mention no others, wrote distinct treatises on 
economics. Greek and Roman economic life was not only 
based on slavery, but never outgrew the period of domestic 
industry and petty trade. This explains both the content 
and the omissions in Greek and Roman economics. Wealth 
existed, and we find the term discussed; but stress was laid 
primarily upon the uses to which it might be put by the indi- 
vidual. The idea of value was apprehended, and the distinc- 
tion between utihty and value pointed out; but no further 
application of the distinction was made. Private property had 
long been known; and we thus find interesting theories as to 
its origin and justification as against the dreams of the com- 
munists, the socialists and the land nationalizers, who flour- 
ished then as now. Since the economic conditions were such 
that slave labor was highly productive, slavery was defended 
as a natural institution ^nd as compatible with the highest 
morality. 

In the early system of industry the relation of master and 
slave was like that of husband and wife, of parent and child; 
the slave, the wife and the child all belonged to the household 
head; their labor was necessary to the family maintenance. 
When in later centuries the economic conditions of imperial 
Rome made slave labor less productive, it is significant that 
the writers first pointed out the moral shortcomings, and a 
century or two later the economic defects, of slavery. In the 
main, however, at the time of the chief prosperity of Greece 
and Rome, industrial capital did not exist as a controlling force 
in production: thus neither the term nor the idea is found; 
capital is not yet differentiated from wealth. It is a striking 
fact that Aristotle seems to have a premonition of a future 
industrial system when he says: "If the combs would make 
the web close, or if the keys of themselves struck the harp, 
masters would need no assistants nor slaves." But although 
capital had acquired no importance, a considerable division of 



§ 48] Theory in Antiquity 1 1 1 

labor based on handicraft industry is found in actual life and is 
accordingly discussed in the economic treatises. 

If the theory of production was simple, that of distribution 
was entirely absent.' For it was the landowner who controlled 
the processes, and owned the results, of production. The land- 
lord was the property lord, and even where commercial capital 
developed, it was the large landowner who also carried on 
the great commerce. Even where the independent tradei 
developed, however, his gains seemed to be of the same nature 
as those of the landowner. There was thus no distinction recog- 
nized between land and capital, as factors in production. The 
landlord, again, was the slave owner; there was thus no line 
drawn between land and labor, and no theory of wages. The 
doctrines of rent, profits and wages did not emerge, because 
the phenomena themselves did not exist as the incomes of 
separate social classes. There was not even a theory of indi- 
vidual income; the mass of property yielded indeed a return 
or produce, but this entire produce simply went to swell the 
property, just as the expenses had been a part of the property. 
We have many terms for property, but no distinction between 
produce and income. 

This explains also the classical theory of interest. Funds 
were loaned not as capital, but as money. So far as there was 
any credit, it was primarily for consumption; that is, the loans 
were mere personal loans made to tide over temporary em- 
barrassment. Even when money was loaned in agriculture or 
in trade, the function of capital was not understood, because 
only when capital is used in industry is it easy to realize its 
productivity. Interest was thus regarded as paid for the use 
of money, and, as money is in itself barren, interest was deemed 
unjustifiable. As a matter of fact, the interest charged on such 
loans did often have the effect of usury and frequently resulted 
in the subjection of the debtor to the creditor. In the absence 
of industrial capital there was some justification for the theo- 
retic opposition to interest. In the later centuries of impe- 



1 1 2 Economic Thought [§ 49 

rial Rome, when commercial capital had developed, interest 
became necessary; but it was then defended in the Roman 
code by virtue of a legal fiction, not on economic grounds. 

During the later period of Greek and Roman life the origi- 
nal barter economy had given way to a money economy. 
The classic writers therefore devote some attention to the 
theory of money. The whole theory of price, however, was 
still much neglected, because trade was something outside of 
the ordinary activity of the slave plantation, and business en- 
terprise had but little scope under a system of handicraft in- 
dustry. It is thus easy to understand Aristotle's and Plato's 
condemnation of such vocations as something "unnatural," or 
Cicero's characterization of them as sordid and ''unbecoming 
a gentleman." As with the private economy, so with the 
public economy. The revenues of government were derived 
chiefly from its own lands, worked in the same way as in any 
private household. Direct taxes were unknown except in ex- 
traordinary emergencies. The amassing of treasure, not the 
use of public credit, served for war purposes. Hence the 
Greek treatises on public finance deal with subjects that are 
almost completely absent from modern works. 

Classic antiquity, in short, had an economic theory which ex- 
plained its economic phenomena; we must not criticise it on the 
ground that it does not explain our phenomena. 

49. Mediaeval Economic Theory 

After the intervening centuries of mental darkness and indus- 
trial stagnation, economic theory began anew with the growth 
of enterprise in the twelfth century. The new theory was the 
outgrowth of the new economy. The typical fact of this new 
economy was, as we have seen, the development of trade and 
commerce, no longer based on slavery. The great problem of 
mediaeval economics thus became the problem of exchange 
value and how to make this new kind of values conform to 
the demands of justice. Since things were no longer made to 



§ 49] Mediaeval Theory 1 1 3 

be consumed at home, as in the earher centuries, but were 
now made to sell, the question arose, for what shall they sell, 
or what is the proper and reasonable price? The answer 
could not be the price as fixed by competition, because in the 
mediaeval economy there was no free competition. Goods 
were produced by the guilds, but the guildsmen could not 
underbid each other. Even in articles which came from out- 
side, to take advantage of one's neighbor by purchasing the 
wares before they reached market, or by buying at wholesale 
to sell at retail, was deemed a heinous offence. In an economy 
whose keynote was production to order, and where every one 
did just what his father had done, custom, not competition, 
fixed the price. With human nature as it is, however, men 
would always be found who attempted to overreach their 
neighbors. Since custom could not be relied upon, it became 
necessary for government to step in and to regulate the price. 
In point of fact, when mediaeval prices were not regulated by 
custom, they were fixed by statute. 

Economic theory thus discussed the question: what is the 
just or the natural price? It became in part a moral question, 
even though the answer must rest on economic considerations. 
The mediaeval economists were no longer the general philoso- 
phers, as in classic antiquity, but primarily the theologians. 
Economics became a part of theology. 

In framing his theory, the mediaeval economist had to take 
business life as he found it. The characteristic fact of mediae- 
val industry was the free laborer, the petty guildmaster. Slav- 
ery was fast disappearing, and accordingly, with the exception 
of a few of the early authors who were strongly influenced by 
the newly discovered writings of Aristotle, we find no defence 
of slavery. Again, since the whole economy was now based 
on industry and trade, the classical theory of business as an 
unnatural pursuit soon disappeared. Now arose the question: 
how should business gains be explained, — or, in other words, 
what fixes the price of the finished article? 



1 1 4 Economic Thought [§ 49 

There could be only one answer to this question. Industrial 
capital did not exist, — that is, not as an important or typical 
fact. Since there was no conception of capital, there could 
be no theory of profits. The guildmaster employed his own 
work, on his own tools. The labor expended was the chief 
consideration; and cost of production became the explanation 
of the reasonable price, and the guide to the legislator in fix- 
ing tariffs. To carry on business for the sake of making gains 
was therefore still deemed immoral, but to trade in order to 
recover the result of one's labor was justifiable. Money mak- 
ing as such is wrong; money making to support one's self or 
one's family by the proceeds of one's industry is legitimate. 
All through the middle ages the economic theory objected to 
a man charging more for a thing than it was worth, or buying 
a thing cheap and selling it dear, or selling a thing at a higher 
price for credit than for cash. For in all such cases it was 
presumed that gains were made without any actual labor 
having been expended. It was only as business enterprise 
developed that the other constituent elements of gain were 
recognized; but the theory continued to include them in the 
actual labor cost. 

The other great mediaeval theory -^ the usury doctrine — 
may likewise be put under the head of exchange. For usury 
was regarded as the price paid for the use of money, itself the 
medium of exchange. In an age where the productive em- 
ployment of capital was unknown, the prohibition of interest 
did, on the whole, more good than harm. As commercial 
capital developed, the force of the prohibition was weakened 
by the economic theory of damnum emergens and lucrum ces- 
sans: if the lender could show that he had suffered any loss or 
had been prevented from making any gains through not having 
the money, he might charge a return. The wedge was slowly 
pushed farther in; but it was not until industrial capital had 
developed at the close of the middle ages that a distinction 
was drawn between legitimate interest and illegitimate usury. 



§ 49] Mediaeval Theory 1 1 5 

In the guild system proper, where no capital was needed, 
interest was an anachronism. 

The only other economic topic that was discussed in addi- 
tion to these two fundamental points, was likewise one of 
exchange, — that of money. Money became of such para- 
mount importance that we find the treatment of money prob- 
lems no longer confined to the theologians, but participated in 
by specialists. The mediaeval writers on money form almost 
the only class of lay economists, pure and simple. 

Mediaeval economic theory, therefore, centered about the 
problems of exchange. Production was so simple that it was 
not discussed. In the absence of capital, there was no ques- 
tion of production on a large or small scale. Since the prd- 
ductive process was a unit, there was not even a discussion 
of the division of labor. Problems of distribution there were 
but few. Since there was no industrial capital, there were no 
profits; since the workman was in the main his own employer, 
there were no wages, or so far as wages were paid, they were 
paid by the consumer, and not by any capitalist employer. 
Even though the conception of rent to the landlord now 
appeared, the land was not normally bought and sold, and the 
landl9rd's rent was regarded, not as a separate source of in- 
come, but as a kind of property, like that of the ordinary 
townsman. Finally, problems of consumption attracted little 
attention. In an age when custom reigned supreme, and 
when unusual expenditure was deprecated as ungodly, the 
effects of social expenditure and the connection between social 
demand and production were so slight that they were scarcely 
noticed. 

The mediaeval economists therefore were confronted with 
comparatively simple problems. These problems they attacked 
with ability and with some degree of success. It was not long, 
however, before the economic conditions changed, bringing 
with them new problems and fresh attempts at analysis. 



1 1 6 Economic Thought [§ 50 

50. The Mercantile Doctrine 

Modern economics may be said to date from the close of 
the sixteenth century. This century is marked by one great 
fact which could not have failed to arrest attention, — the 
revolution in prices which went hand in hand with the intel- 
lectual revolution due to the printing-press, with the religious 
revolution due to the Reformation and with the political rev- 
olution due to the weakening of the feudal system. The 
colonization of the new world led to a vast influx of the 
precious metals; the discovery of the trade routes to the East 
opened up new channels of commerce and revivified industry; 
the old regime of customary prices slowly gave way before the 
new force of competition; the guild system broke down as 
the power of capital made itself more apparent and as industrial 
conditions outgrew the narrow limits of the local economy. 
Thinkers like Bodin in France and Hales in England began 
to ponder these newer conditions of economic life and to 
discuss the relations of private wealth to public welfare. The 
economic theories from that time may be subdivided into 
three periods, — the mercantile theory, which first sought to 
crystallize the idea of the national economy; the theory of 
Adam Smith and Turgot, which represented the domination 
of the domestic system of industry, although in its cosmopol- 
itan ideas much influenced by the doctrines of the Physiocrats; 
and finally the Ricardian theory, which marks the triumph of 
the factory system. 

The mediaeval thinkers had centred their attention on the 
money supply, and had used every endeavor to bring the pre- 
cious metals into the town and keep them there by controUing 
each individual bargain through manipulating the exchanges, 
and similar devices. The newer school of economists still 
emphasized the importance of the money supply, but owing to 
the changing conditions of trade were enabled to recognize 
the futility of the old measures. According to them, a surplus 



§ 5o] Mercantile Doctrine 117 

of coin is indeed desirable, but it can best be secured by an 
excess of exports over imports resulting in a balance of trade 
rather than by manipulating the exchanges so as to secure a 
favorable balance in each particular transaction or bargain. 
The first great economic controversies were those between 
the advocates of the Balance of Bargain and Balance of Trade 
theories. Because of their insistence on this mere exchange 
of merchandise, the newer writers are usually called the 
Mercantilists. 

In truth, however, this was only an incidental result of their 
teachings. The breakdown of the local economy and its 
replacement by the larger unit led thinkers to search for 
the true causes of national wealth and national greatness. 
They saw that this could be attained only by an increase of 
national production; and since industrial capital was now 
making its appearance, they emphasized the need and the 
value of national industry. Just as the older theory was dis- 
proved at the beginning of the seventeenth century almost at 
the same time by an Englishman (Mun), a Frenchman (Mont- 
chretien) and an Italian (Serra), so the practical policy of 
national expansion and the abolition of the local restrictions 
on trade and industry were pursued by statesmen like Sully in 
France, Cromwell in England and later by Frederick the 
Great in Prussia. 

Judged from the present point of view, the error of the Mer- 
cantilists lay in confounding a balance of exports over imports 
with a surplus of production over consumption (see below, 
§211). At the time the theory was first formulated, how- 
ever, an increase of national exports was indeed the most 
obvious method of measuring the increase of national produc- 
tion. In the early stages of capitalist enterprise and of inter- 
national competition, the policy of national protection was 
suggested as a means of national industrial growth; but this 
system was itself an advance on the narrow exclusiveness of 
the mediaeval town. The Mercantilists all clamored for "Free 



1 1 8 Economic Thought [§ 51 

Trade," but their free trade meant a freedom of exportation, 
and a liberation of internal trade from the trammels of the 
local economy. The enlightened Mercantilists looked upon an 
abundant money supply not as the cause, but as the result, and 
therefore as the best indication, of industrial growth and 
national prosperity. 

The problems which confronted the economists of the seven- 
teenth and first half of the eighteenth century were thus prin- 
cipally problems of production and exchange, from the point 
of view of the relation of government to the social structure. 
Hence the term political economy began to be used, and 
considerable progress was made in analyzing the problems of 
trade. The problems of distribution, however, were only just 
beginning; the domestic system of industry was differentiating 
a wages class; and the growth of industrial capital was only 
slowly bringing into view the recipients of profits as against 
the recipients of the rent of land. The sHght theory that we 
find on the subject is incomplete and often incorrect. It was 
difficult for the writers amid these half-developed conditions to 
go beyond the surface fact that low wages seemed to mean low 
cost and therefore successful competition with other countries. 
It was reserved for the great thinkers toward the close of the 
eighteenth century to voice the newer ideas on production and 
distribution alike, and to disclose the elements of public pros- 
perity, suited to the economic age in which they wrote. 

51. Adam Smith and the Physiocrats 

If we were to sum up in two phrases the real contribution of 
Adam Smith to economics, it would be the theory of cosmo- 
politanism and the theory of distribution. Of these the one 
was original, the other partly borrowed; but both were shaped 
by his economic environment. 

The statesmen of the eighteenth century had been pushing 
the Mercantilist doctrines to an extreme. While the system of 
national economic expansion had marked an advance as com- 



§ 5i] Adam Smith 119 

pared with the mediaeval system, the time soon came when the 
centre of economic interest was shifted from internal to exter- 
nal considerations; and when what had seemed liberty from 
the one point of view now from the other appeared to be 
restriction. In certain countries at least the disadvantages of 
the system came to outweigh its benefits. Just as the guild 
system had originally been a spur to industry, but had ulti- 
mately become a drag upon it, so the mercantile system of 
regulation changed from a boon to a drawback. The advance 
had consisted in emphasizing the national idea; the retrogres- 
sion consisted in accentuating the exclusive idea. In the well- 
meant effort of the legislator to further industry, he often 
throttled it. The government now interfered with everything, 
and often accomplished less than nothing. The colonies, 
instead of strengthening the mother country, broke loose 
entirely or weakened her. Trade was conducted on the 
principle that what one nation gained the other necessarily 
lost. 

The very expansion of international relations, however, and 
the immense growth of the foreign market induced the eigh- 
teenth-century thinkers to take a broader view. Adam Smith 
and the Physiocrats, each influenced by the doctrine of Natural 
Law, endeavored to show that economic phenomena, like all 
others, were reducible to principle. The most important cor- 
ollaries of natural law were to them private property and 
individual liberty. The liberty whose economic aspect they 
emphasized consisted of complete freedom in internal industry 
and in external trade. The demand for freedom of industry 
no longer meant freedom from the action of local government, 
but freedom from the action of national government as well; 
the demand for freedom of trade no longer meant liberty of 
export, but liberty of import as well. Just as it was recognized 
that the various provinces of a nation benefited from freedom of 
exchange among each other, so it was claimed that the various 
nations of the world would equally benefit. Instead of national 



I20 Economic Thought [§51 

exclusiveness, economists demanded cosmopolitan freedom. 
Under the influence of the natural law each nation would then 
derive its maximum advantage. 

This importance of the natural law of freedom in economics 
was emphasized by both Adam Smith and the Physiocrats. 
Although the Physiocrats were first in the field with the pub- 
lished system — the word Physiocracy denotes ''the rule of 
nature" — Adam Smith taught the identical ideas at about the 
same time in his lectures at Glasgow. The doctrine of cosmo- 
politanism was in the air. 

The other great theory — that of distribution — we owe 
primarily to the Frenchmen; not so much indeed to the Physi- 
ocrats as to the great statesman, economist and philosopher, 
who was only a half- Physiocrat himself, — Turgot. The leader 
of the Physiocrats — Quesnay, the court physician — struck by 
the abyss between the luxurious noble and the squalid peasant, 
concluded that agriculture was the only source of wealth, and 
the peasant the only productive member of society. In an 
age of periodical famine the food supply seemed to him of 
transcendent importance. Turgot only half accepted this idea; 
but taking his cue from the Physiocrats with their idea of 
natural law and their effort to trace the final distribution of the 
wealth created by the farmer, he analyzed industrial society as 
he found it, and saw that the product of industry was divided 
into separate shares. We now for the first time have a theory 
of capital, a theory of rent, a theory of interest and profits, a 
theory of wages. 

This theory was adopted and developed by Adam Smith. 
He rejected, indeed, the doctrine of the Physiocrats that 
agriculture alone yields a net product. On the contrary, he 
generalized the conception, and maintained that all industry 
might yield a product. Thus we often speak of Smith as the 
founder of the industrial system of economic theory as against 
the agricultural system of the Physiocrats. But the funda- 
mental doctrines of Smith in respect to the laws of distribu- 



§ 52] Ricardo 121 

tion were similar to those of Turgot. Both Turgot and Smith 
lived in the midst of the domestic system of industry. This 
was more developed in England than in France, where the 
abuses of the guild system still lingered and where agricul- 
ture was more important than industry. Thus we find Turgot 
sharing in some points the views of the Physiocrats, while Adam 
Smith was able in part to cut himself loose. Turgot and Smith, 
however, attempted to explain the laws of rent, profits and 
wages, because now for the first time the capitalist employer 
was differentiated from the landlord, and because the wages 
class had assumed a new importance. The laborer, however, 
still controlled the process of production; the "manufacturer" 
with Adam Smith is still the manual worker. 

Adam Smith, as also to a less extent Turgot, may therefore be 
called the theorist of the domestic system. He differs from the 
Physiocrats in accentuating the industrial rather than the agri- 
cultural element in wealth and production; but he agrees with 
them in emphasizing the cosmopolitan rather than the national 
elements in public wealth. B^Csitse of this broader view they 
both attempt for the first time to study the whole range of 
relations between private property and public wealth, between 
liberty and industry. 

52. Ricardo and Modern Economics 

Adam Smith wrote on the eve of the industrial revolution. 
It has often been observed that the year 1776 marked the 
publication of the Wealth of Nations and the Declaration of 
Independence, thus voicing the demand for liberty in industry 
as well as in politics. But it is equally worthy of note that the 
same year witnessed Watt's great discovery of the steam-engine. 
It took several decades for this and other great inventions to 
change the aspect of the industrial world; but in less than half 
a century the transition had been accomplished in the leading 
industries of England, and was making rapid strides in the 
others. In France the process had scarcely begun; in the 



122 Economic Thought [§ 52 

other continental countries the domestic system itself was still 
contesting the guild system. Hence the thinker who could 
analyze the new system of industry could be sought for only 
in England, for in no other country did that system exist. 
Ricardo was the first theorist of the factory system. 

It is no mere coincidence that Ricardo should have been a 
stockbroker. This man of genius, whose daily life trained him 
to observe the almost perfect sway of competition and the well- 
nigh complete fluidity of capital on the exchange, was well 
calculated to apply these considerations to a wider industrial 
world, whose characteristics were coming to be those of free 
competition and the supremacy of capital. Starting with a 
study of the money question, Ricardo ended with an analysis 
of industrial society. The theories of cosmopoHtanism and 
liberty he took from Adam Smith, but he developed them 
further, because this theory of free_^ competition seemed to be 
even more applicable to the factory system than to the domestic 
system. The former theory of distribution, however, no longer 
quite sufficed. The manufacturer was now not the manual 
worker, but the employer who did no manual work. The 
"money interest," which in Smith's time was only slowly 
forging to the front, was now becoming the dominant factor in 
English life. The antagonism between land and capital led to 
a new analysis of rent in contrast to profits. The mass of the 
working population had become wage-earners, but England's 
growing prosperity seemed to rest on the development of 
capital. Hence the law of wages was re-analyzed, in terms of 
profit, and the acme of truth seemed to be realized in the 
statement that wages and profits vary inversely to each other. 
Moreover, since capital had now assumed a new importance in 
the shape of machinery, the study of capital became largely a 
study of the economic effects of machinery. Everywhere in 
the civilized world of to-day the study of the theory of indus- 
trial phenomena goes back to the analysis of Ricardo. 

The Ricardian doctrines themselves, however, have been 



§52] Modern Economics 123 

modified in some points by recent investigation. It would be 
surprising if the century that has elapsed since Ricardo wrote 
should not have brought about changes in conditions which 
were soon reflected in theory. In some respects the theories 
have been amplified rather than altered. The economic life of 
the last half-century has been marked by three great facts, — 
the increased consumption of the masses, the revolution in the 
means of transportation and the tendency of capital toward 
concentration. The changes in consumption have led to a 
deeper analysis of the central problem of value, especially 
through the efforts of Jevons and the Austrian school. The 
revolution in the means of transportation has given free scope 
to the force of speculation, and has led to its more careful 
study. The growth of capital has produced not only large 
scale industry, but integrated industry, and has brought about 
a closer scrutiny of the monopoly problem. 

In other respects, however, the theory has been modified 
rather than amplified. The Ricardian doctrine of free compe- 
tition and natural liberty had two important practical corolla- 
ries: the one as applied to internal affairs meant laissez-faire 
or non-interference by government; the other as applied to 
foreign affairs meant free trade. The experience of the nine- 
teenth century has conclusively shown that both these demands 
are of relative rather than absolute validity, and that under 
certain conditions they may prove detrimental rather than 
beneficent. This has led to a fresh analysis of the theories of 
liberty and competition, more suited to the modern changes. 

Above all, however, the complete triumph of industrialism, 
which was in its infancy when Ricardo wrote, has brought into 
clear relief many tendencies which were then scarcely discern- 
ible. Ricardo had elucidated the law of rent, but his theory 
of profits was incomplete, the connection between interest and 
profits dimly appreciated, and the relation of both to rent not 
clearly apprehended. Above all, the position of the laborer 
and the relation of wages to profits were not thoroughly grasped. 



I 24 Economic Thought [§ 52 

In the first flush of the new regime the function of the capitalist 
was naturally overestimated, and an undue emphasis put on 
production. So far as social reform was deemed at all practi- 
cable, it was thought to depend on the prosperity of the capi- 
talist and on the care taken by the laborers to marry late and 
have small families. 

It was the social discontent of the middle of the century 
which was responsible for a change. Karl Marx did an admi- 
rable work in showing the essential relativity of economic 
institutions and in pointing out the influence of economic facts 
upon social and political life; and his keen criticism of existing 
theory and actual society did much to bring about a revision of 
the laws of distribution. While the socialist criticism, however, 
was fruitful, its constructive analysis was erelong seen to be as 
one-sided as the one which it had endeavored to replace. It 
has been reserved for recent economic theory, especially in the 
works of Marshall, Walker, Clark and their followers, to take 
the saner view and to show how and why social progress and 
the growth of capital are intimately bound up with the advance 
of the mass of the workers. Thus the modern theory of eco- 
nomic life fits in not only with the facts of the business world 
but with the demands of social reform. The economics of 
to-day has finally reached the stage where it seeks to retain the 
cold impassivity of science and yet to reflect the warm glow of 
human interests and living ideals. 



Book III 
Conditions of Economic Life 



CHAPTER IX 

PRIVATE PROPERTY 

53. References 



C. Letourneau, Property, its Origin and Development (igoi); E. de 
Laveleye, Primitive Property (trans, by Marriott, 1878); F. de Coulanges, 
Origin of Property in Land (trans, by Ashley, 1891); E. Jenks, History of 
Politics (1900), ch. x; H. S. Maine, Ancient Law (1880), ch. viii, and 
Village Communities (1881), Lects. 3, 6; E. Kelly, Government or Human 
Evolution, II (1901), bk. i, ch. iii; J. S. Nicholson, Principles of Political 
Economy (1893), bk. ii, ch. ii; F. W. Maitland, Domesday Book and Be- 
yond (1897); J. H. Lewinski, The Origin of Property (1913); R. T. Ely, 
Property and Contract (1914); T. Veblen, The Instinct of Workmanship 
(1914), ch. v; E. Demolins, Comment la Route cree le Type Social (2 vols., 
1900-1903); V. G. Simkhovitch, "Hay and History" in Political 
Science Quarterly, vol. xxviii (1913). 

54. Origin of Private Property 

The institution of private property lies at the basis of modern 
economic life. It has become so ingrained into our modes of 
thought that we commonly regard it as a natural right. Never- 
theless private property, like every other economic institution, 
is the result of a long evolution. It is a relative rather than 
an absolute category. 

In the early stages of society the conception of private prop- 
erty is absent. Primitive man, like his brute ancestor, seized, 
but soon consumed, his articles of food. Even when he learned 
to provide for the morrow, and like some animals to accumu- 

125 



I 26 Private Property [§ 54 

late a store of provisions, he was able to retain control of them 
only so long as no stronger savage came his way. There may 
have been temporary possession, there was no recognized 
ownership. The earliest idea of property as distinct from 
possession was communal, not private. As the human hordes 
roamed about from place to place in the quest of food, they 
came to regard certain sections as their particular preserves, 
into which no other savages were admitted. Appropriation 
and user thus became the germs of property; but it was social 
and not individual user. As concerted action was generally 
necessary in order to secure subsistence, the food was distrib- 
uted according to definite rules by the representatives of the 
group. Even religious objects, like sacred stones and feathers, 
were preserved by the group as a whole. 

The first type of private property is found in the ornaments 
and the scanty articles of clothing. These were almost from 
the outset regarded as an integral part of the personality of 
the individual. The next step was reached when certain 
weapons were taken out of the general stock and associated 
with the exceptional prowess of some member of the group. 
The weapons, like the ornaments, were supposed in some way 
to reflect the personality of the individual, and when he died 
they were usually burned or interred with his remains. As 
civilization reached a higher stage, the movable shelters or 
wigwams and the scanty stock of tools and utensils were re- 
tained in the ownership of individuals. We can, however, 
scarcely yet speak of any differentiation of private property. 
Its social importance was insignificant in the extreme, and 
there was no motive for accumulation. After a narrow limit 
had been reached, additional ornaments became a burden, more 
weapons and tools were valueless. The group, not the individual, 
efforts were still the controlling factors in the economic life. 

The decisive step was taken with the domestication of ani- 
mals. As soon as it was discovered how to preserve flocks 
and herds, it was possible for the individual to dissociate his 



§54] Origin 127 

economic life, to a small extent at least, from that of the group, 
and by giving freer rein to his own powers to start on the path 
of independence and prosperity for himself and his own imme- 
diate circle. Private property now assumed a position of 
increasing importance: it created, as we have seen, the patri- 
archal family, and it engendered the distinction of rich and 
poor. Wealth now consisted of flocks and herds; personal be- 
longings in the shape of jewelry and treasure were prized not 
only for themselves but because they could be bartered for 
live stock. The original ''chattels" are the ''cattle." Human 
dependents, moreover, were needed to care for this increasing 
wealth: the wives and the children of the patriarchal head 
were regarded as his private property, and where even these 
did not suffice, we find the beginnings of slavery. The slave 
(famel) soon became the most important element in the family. 
On the other hand, there was no private appropriation of land, 
because it was unnecessary. The herdsmen wandered, accord- 
ing to seasonal or climatic conditions, in search of fresh pastures, 
and the tribal customs were still sufficiently strong to prevent 
individuals from appropriating particularly favored spots in 
the general area. 

Two points thus stand out clearly. First, private property 
consisted for a long time only of movables, animate or inani- 
mate, that is, of animals, human beings, and personal chattels. 
A community which is continually on the march cannot de- 
velop property in immovables. Secondly, the origin of private 
property is to be sought in user and seizure. Compulsion and 
even rapine are frequently the starting-points. of the accumula- 
tion of wealth. Yet this selfish accumulation is the means of 
attaining a higher stage of welfare for the community as a 
whole. It increases not only production but civilization. The 
ethical stage of a pastoral tribe is superior to that of a group 
of hunters. The institution of private property, while intensi- 
fying many of the unlovely characteristics of human nature, is 
also responsible for those qualities, like thrift, foresight, fru- " 



128 Private Property [§55 

gality, energy, sobriety and sanity, without which no enduring 
progress was possible. Property was becoming private, but 
since the individual was still in large measure controlled by 
the group, the sanction of private property remained social 
in character. The individual was permitted to enjoy private 
property because it was recognized to be conducive on the 
whole to the interests of the group. From the very beginning, 
therefore, out of evil there came good; out of the violence 
inseparable from early private property there evolved the 
orderliness of a stable society. 

55. Growth of Property in Land 

The next step was taken when the developed agricultural 
stage was ushered in. This had two important results: it 
greatly extended slavery, and it created private property in 
immovables. It extended slavery, because profitable cultiva- 
tion of the soil was contingent upon an adequate labor force. 
Compulsory and gratuitous labor would naturally swell the gains 
of the owner. Increasing agriculture involved, under certain 
conditions at least, increasing private property in slaves. 

It also involved the creation of private property in im- 
movables. As fixed settlements replaced the early temporary 
abodes, the need and utility of more durable habitations be- 
came evident. Private property in houses, however, rendered 
possible on a much larger scale the accumulation of personal 
belongings within the house, and this accumulation of wealth 
was brought about by the increased earnings of agriculture as 
contrasted with flock tending. The evolution of private prop- 
erty in land, however, was far slower than in the case of houses. 
In a few instances, where geographical and climatic reasons 
made it difficult for the pastoral group to eke out a living in 
common from the soil, as in Norway, and where there was less 
fear of attack from organized bands of marauders, the indi- 
viduals started out as farmers, each for himself and each appro- 
priating as much of the land as he needed. User soon hardened 



§ 55] Property in Land 129 

into ownership. So also when new colonies were planted by 
the offshoots of communities long acquainted with agriculture, 
the colonists, as in America, naturally brought with them the 
practice of individual land ownership and separate holdings. 
In most places, however, where the grazier slowly turned into 
a farmer, the communal practices disappeared only by slow 
degrees. Just as the nomad group had pitched its tents together 
and had allowed the flocks to graze in common, so now the 
village houses were grouped and separate plots of land in the 
surrounding area were temporarily assigned to the cultivators. 
These temporary assignments of different grades soon become 
permanent, although the method of using them was strictly 
subject to communal needs. For as population increased 
and the holdings were subdivided, the different grades of land 
were carved up into strips, the same individual often possess- 
ing sections in different parts of the arable area. This system 
of intermixed strips necessitated a whole body of communal 
rules in order to insure a proper cultivation. The strips were 
too small to be fenced off. In the open-field system, as it was 
therefore called, not only was it clearly inadmissible for one 
man to use his strip as pasture with the risk that his animals 
might stray on the cultivated plot of his neighbor, but in addi- 
tion far better results were obtained by planting large areas in 
the same way. Thus the mediaeval village community or mark 
was based on the idea of common cultivation, and the original 
community of property was long preserved not only in the 
forests, the free use of which under certain restrictions belonged 
to every member of the group, but also in the pasture land, 
where every one had the right to graze his cattle, and even in 
the arable land which, after the crops were taken off, reverted 
to communal use. 

While private property in land within the group was thus 

developing, there was another element at * work, proceeding 

from above rather than from below. As the conquering tribes 

seized upon fresh tracts, it became of signal importance to 

9 



130 Private Property [§ 55 

defend the settled agricultural possessions. This duty was 
assigned to the military chieftains, who in many cases were 
the wealthiest flock-owners. With the transition to agricul- 
ture, the old personal and tribal relations gave way to territorial 
and poUtical relations. In other words, the state developed 
and the local divisions and counties were put under the pro- 
tection of the over-lords. The tenants, or vassals, whether 
individuals or groups, now paid a portion of their agricultural 
earnings as the price of protection, and the military occupa- 
tion of the district by the chieftain before long hardened into 
the institution of private property. The war lord became 
the landlord. The marquis was originally the defender of the 
"March." The property rights of the cultivator were held to 
be subordinate to those of the lord. Thus was ushered in 
the system of feudaHsm, based on the preponderance of the 
manorial lord and the hierarchy of social relations. 

In some cases the cultivators lost their original prerogatives 

« 

and dwindled into mere tenants without any property rights 
at all. In other cases they contrived gradually to free them- 
selves from their rents and other feudal payments, while at 
the same time the common cultivation gave way, under the 
impulse of more modern methods, to individual tillage. In 
this manner was formed the peasant proprietorship of many 
European countries. The land became thus the private prop- 
erty of either the lord or the peasant, until finally with the 
development of industrial capitalism real estate was put on an 
equality with personal property. In America and many parts 
of Europe land is now bought and sold almost as readily as 
any kind of chattels. 

Here again we notice the social sanction of private property. 
The origin of property in land as of that in flocks was often 
connected with force and fraud, but in this case as in the other 
the community as* a whole was benefited. The private prop- 
erty of the feudal chieftain meant the growth of security and 
social order, which formed the foundations of increased pro- 



§ 56] Theories 131 

duction. The development of landed property within the 
communal group of cultivators was the result of the recogni- 
tion of the social importance of individual action. As long 
as common cultivation brought about the best utilization of 
the fields, it remained the prevalent system; but when in more 
recent periods the opportunity of raising hay made a more inten- 
sive cultivation possible, the advantages of a more individual 
method were soon manifest. The old common or open fields 
were now enclosed, and each landowner, freed from what had 
become the shackles of a common cultivation, turned his own 
plot to the best use. Private property in land thus reached 
its climax, because it carried with it individual freedom for 
use. The augmented agricultural profits were due to increased 
production, so that private property here again redounded 
in the main to the advantage of the community. Real estate 
like personalty, immovables like movables, have become pri- 
vate property because of the recognition by society of the 
social advantages of individual ownership. 

56. Theories of Private Property 

Two important corollaries follow from what has just been 
said: first, the justification of private property is its social 
utility, and second, the extent of private property rights must 
always be limited by their social consequences. 

The earliest theory of private property as found in some of 
the Roman writers is the occupation theory. The doctrine 
that property belongs of right to him who first seizes it is, how- 
ever, one that can apply, if at all, only to the earliest stages of 
development. Where no one has any interest in the property, 
no one will object to the assertion of a claim by a new-comer. 
When property is without any discoverable owner, we still to- 
day assign it to the lucky finder. But when the property is 
already utilized by others, whether as groups or as individuals, 
or when the property is newly created by human effort, the 
assertion of the right of occupation involves a theory of force 



I 3 2 Private Property [§ 56 

rather than of justice. The occupation theory may explain 
how the present legal title to certain forms of property origi- 
nated; it cannot serve as a justification of private property, 
except in the rare case of previously unoccupied or unutilized 
wealth. The mere fact that a person has seized a thing is no 
reason why he should retain it. 

The next doctrine was the natural rights theory. Private 
property, so we were told by the philosophers of antiquity 
and the publicists of the later middle ages, is a natural right, a 
part of the law of nature. It will at once be asked, however, 
what is denoted by nature? If by nature we mean the physical 
and animal world outside of man, it is clear that the only laws 
of nature are the laws of the necessary relations of phenomena 
and that the only natural right is that which flows from the law 
of might or of the power which explains these phenomena. In 
this sense all civilization is an endeavor to escape from the 
original reign of natural law among brutes. Nature is here 
opposed to human progress. Private property, then, is un- 
natural because it is not found in a state of nature. If, on the 
other hand, by nature we mean the constitution of the entire 
universe, including man, and if it is contended that private 
property is natural in the sense that it is necessary to the full 
self-realization of the individual as the bearer of the world idea, 
the obvious rejoinder is that we are applying the term natural 
right to our temporary idea of what ought to be right, and that 
history unmistakably shows a continual change in our ideas of 
what ought to be. The great philosophers of antiquity upheld 
private property in slaves as a natural right. Much of what 
we to-day consider natural, our descendants will deem un- 
natural. Our conception of nature in this sense is essentially 
ephemeral and mutable. 

Driven from this position, the natural rights school took 
refuge in the labor theory, and maintained that the real title to 
private property is derived from the toil and trouble experi- 
enced in creating it. Surely, it will be said, a thing belongs of 



§ 56] Theories 133 

right to him who produces it. But at once comes the reply: 
no one has created the land. As a consequence, we find thinkers 
of all ages, from Phaleas of antiquity to the disciples of Henry 
George to-day, who contend that private property in land is 
unjust, while maintaining that private property in everything 
else is defensible. These critics, however, overlook the fact 
that the difference between land and so-called labor products 
is in this respect, at all events, one only of degree, because 
nothing is the result of individual labor alone. The carpenter, 
it is said, rightfully owns the table which he has made. But 
to what extent has he made it? The tree which affords him 
the raw material was not created by him; the axe with which 
the tree is felled is the accumulated result of centuries of inven- 
tion expended by his ancestors; the stream along which the 
log is floated is not of his making. To pass over all the other 
intermediate processes, how long would he be secure in the 
possession of the tools he has used or of the product he has 
finished, were it not for the protection afforded to him by the 
law? And finally, of what use would the tables be unless there 
were a demand for them on the part of the community? The 
value of the table is as little the result of individual labor as is 
the value of the land. Society holds a mortgage over every- 
thing that is produced or exchanged. 

Since therefore neither occupation, natural law nor labor 
gives an indefeasible title to private property, some philoso- 
phers were led to frame the so-called legal theory of private 
ownership which is in essence that whatever is recognized as 
such by the law is rightfully private property. Obviously, how- 
ever, this is not an economic doctrine. Good law may be bad 
economics. The law generally follows at a respectful distance 
behind the economic conditions, and adjusts itself gradually to 
them. The legal theory tells us what property is, not why it is, 
nor what it should be. 

Thus we are finally driven to the social utility theory. This 
is really implied in the preceding theories and supplies the link 



1 34 Private Property [§ 57 

that binds them all together. In ancient as in modern com- 
munities, the individual is helpless as against society, however 
much under modern democracy society may see fit to extend 
the bounds of individual freedom. If we allow the individual 
to seize upon unoccupied wealth, if we recognize the existence 
of certain rights in what are deemed to be the products of 
labor, if we throw the mantle of the law around the elements 
of private property, — in every case society is speaking in no 
uncertain voice and permits these things because it is dimly 
conscious of the fact that they redound to the social welfare. 
Private property is an unmistakable index of social progress. 
It originated because of social reasons, it has grown under con- 
tinual subjection to the social sanction. It is a natural right 
only in the broad sense that all social growth is natural. 

57. Limits of Private Property 

If then social utility is the real justification of private prop- 
erty, it is clear that the extent of private property rights must 
find its limit in social considerations. Take, for example, the 
modern problem of irrigation. The English common-law 
conception of private property — the property that reaches, 
as has been picturesquely said, from heaven to hell — is a 
product of a moist climate, of conditions where there is an 
abundance or superabundance of water, and where private 
interest could be safely depended upon to give the best results. 
But in the arid and semi-arid regions of our western empire 
neither occupation nor labor is deemed to give an equitable 
title to the river or the adjacent riparian lands. The new 
code of private property which is springing up in the West is 
one in which individual rights are clearly and forcibly held 
subservient to those of the community. 

What is true of irrigable land in the West is true in varying 
degree of many forms of private property in the East. "May 
I not do as it listeth me with my own?" is a cry far less fre- 
quently heard than of old. Private property as a concept 



§57] Limits 135 

will no doubt always remain; but the content of the concept is 
continually changing. Property in human beings was at one 
time considered economically advantageous and morally defensi- 
ble. Private ownership of the highways was not so long ago 
usual and justifiable. In the city of New York to-day the proc- 
ess of extinction of private property in docks is fast going on. 
On the other hand, the stealing of electricity or the tapping of a 
telegraph or telephone wire is at present punishable as theft. If, 
as Carlyle tells us, no one believes what his grandfather believed, 
we may almost say that no one owns' what his grandfather owned. 

The right of private property is a privilege conferred upon 
individuals by society. It is recognized as beneficial in general 
because of the consensus of opinion that in the main better 
economic results can be secured by the application of the prin- 
ciple of self-interest. In the present stage of the evolution of 
human nature, private property constitutes the chief incentive 
to better and greater production. The test therefore is always 
the social test. Where, however, the reason of the rule fails, 
the rule itself must fail. That is, where in certain cases the 
results of private property are clearly opposed to the social 
interests, society is justified in restricting the extent of the 
property right. Thus the private ownership of patents and 
copyrights is everywhere granted only for a term of years, the 
right of the owner thereafter lapsing in favor of society at 
large. Again, while property in land is, in general beneficial, 
immense private holdings may sometimes check, rather than 
further, social progress; and may lead to well-considered move- 
ments either to restrict their size, as in New Zealand, or to alter 
the form of the property right, as in the recent Irish legislation 
intended to convert the tenant into a peasant proprietor. 

Interference with the existing rights of private property 
must always depend upon a convincing and irrefragable evi- 
dence of its necessity. For in the main private property and 
individual liberty have been the correlative products of human 
civilization. The limits of economic freedom and economic 



136 Private Property [§58 

competition which we shall discuss in the following chapters 
will throw light upon the bounds of private property. We 
shall see that the maintenance of property rights depends on 
the existence and the beneficence of competition. Where 
competition has given way to monopoly, the automatic control 
of property rights must be replaced by a more positive social 
control. Again, when the condition of equality, which under- 
lies the theory of competition, is absent, competition may 
lose its beneficent force and the economic interests of society 
may demand the fixing of a limit to the exercise of private 
property rights. Certain idealists would go much further and 
advocate communism or socialism. The communist demands 
the complete abolition of all private property; the socialist 
asks for the abolition of private property in the means of pro- 
duction while retaining it in articles of consumption. Both 
are so extreme that in their well-meant endeavor to rectify 
undoubted abuses, they would forego the chief advantages and 
concomitants of modern civilization itself. 

58. Content of Property Rights 

Property rights may be classified under five heads: the right 
of gift, the right of disposition by contract, the right of use, 
the right of bequest, the right of unlimited acquisition. Of 
these the first and second are well-nigh unquestioned. A 
man may not only give away his property as he chooses, but 
he may sell, lease, loan or pawn it. It is only where rem- 
nants of the old feudal law of real estate survive that we find 
any limitation put upon such rights. The third right is some- 
what less absolute. As against the doctrine of "vested rights" 
of private property, the theory of "eminent domain" forms 
the entering wedge of social control which is being continually 
pushed further in by the principle of public policy. Again, 
a man may commonly use his property as he likes. But he may 
not use it in such a way as to create a nuisance to his neigh- 
bor. The individual right is subject to social restrictions. 



§ 58] Content 137 

It is, however, around the fourth and fifth heads that the 
chief controversy has taken place. The right of bequest or 
inheritance is one of late growth. Long after private property- 
was instituted its existence lapsed with the death of the original 
owner and the property itself reverted to the social group. Long 
after the right of bequeathing chattels developed, there was 
no such privilege connected with real estate. Wills and intestate 
succession are everywhere the outgrowth of the family, — the 
immediate kinship which, as we know, was the product of eco- 
nomic forces. To insure the perpetuation of the property 
beyond the life of the testator became one of the most potent 
factors in the desire of acquisition and in the economy of pro- 
duction. Where the economic and social importance of the 
family is great, we even find that the right of bequest becomes 
a duty, with the correlative right of inheritance on the part of 
the surviving members of the family. Such, for instance, is the 
portion legitime or legal right of the children in France and Ger- 
many, or the dower right of the widow in Anglo-Saxon countries. 

W^h__the ^weakening of the family sentiment in modern 
times_and its restriction^_to_ a continually smaller group, the 
movement for a limitation of inheritance lias begun to make 
some headway. The great development of modern progressive 
inheritance taxes and more especially of collateral inheritance 
taxes is an illustration of this tendency. When the rate of 
such taxation reaches 15% as in the United States a few years 
ago, 18% as in England, and 20% or even 25% as in some of 
the states of Switzerland and Australasia, we are on the high- 
road to a considerable limitation of the right of bequest. There 
is every reason to believe, however, that just as the kernel of 
the intimate family will continue to subsist, the movement will 
be arrested at that point where it might imperil the tendency 
to acquisition. 

On the other hand, the right of unlimited accumulation of 
wealth has scarcely been affected. Even though it may be 
conceded that the heaping up of enormous fortunes may seri- 



138 Private Property [§ 58 

ously strain the machinery of democratic government, there 
is an insuperable difficulty in fixing any point beyond which 
the further accumulation of wealth may be declared economi- 
cally or politically dangerous. * We refer here to wealth in 
general, honestly acquired.- Private property in certain things 
indeed is considered wrong, irrespective of amount; dishonesty 
is as reprehensible and as frequent (or as infrequent) in a small 
as in a large business. Great fortunes in general can be hon- 
estly acquired only by conferring great advantages on society; 
he who serves the community best will reap the greatest profits. 
The successful and upright business man retains the market 
only so long as he undersells his competitors, and to that extent 
benefits the consumers. To check profits would mean to check 
enterprise; to check enterprise would mean higher prices and 
greater sacrifice. The limitation of wealth as such is imprac- 
ticable and economically perilous. 

No one, however, would gainsay the essential reasonable- 
ness of the general feeling that prodigious inequalities of for- 
tune are in the long run a menace to the stability of democratic 
virtues. But the solution of the problem cannot be found by 
opposing private property as such, or by erecting a barrier to 
the accumulation of wealth. It is futile to deny or to minimize 
the basic importance of private property on which the entire 
civilization of modern times is built. ;(The economic ideal may 
best be expressed in the words of Aristotle of old, — that prop- 
erty should be private, but its use common. /What he meant 
was to inculcate the idea of the public trusteeship of wealth, 
or the principle of the social responsibility of the wealth-getter. 
Economic progress is indeed intimately bound up with the in- 
stitution of private property, and yet society is asserting a claim 
to be heard in its control and disposition. We are beginning to 
realize the duties as well as the rights of wealth. This moral 
obligation is based on the sound economic conception of social 
utility as at once the justification and the limitation of private 
property, 



I 



CHAPTER X 
COMPETITION 

59. References 

A. T. Hadley, Freedom and Respo?isihility (1903), ch. v ; R. T. Ely, 
Evolution of Industrial Society (1903), part 2, ch. i; J. S. Nicholson, 
Principles of Political Economy (1893), bk. ii, ch. v; E. Kelly, Govern- 
ment, or Human Evolution, I (1898); P. Kropotkin, Mutual Aid a Factor 
of Evolution (1902); W. W. Willoughby, Social Justice (1900), ch. ix; 
C. H. Cooley, Personal Competition (Am. Econ. Assoc, Economic Studies, 
IV, 1899); A. R. Wallace, Studies, Scientific and Social (2 vols., 1900), 
chs. xiv — xvii, xxiii, xxviii; A. Marshall, Some Aspects of Competition 
(Jour. Stat. Soc, LIII, 1890); Clark and Giddings, The Modern Dis- 
tributive Process (1888). 

60. Nature of Competition 

Competition is in a certain sense the law of all life. Biology 
has made us familiar with the animal struggle for existence 
and has disclosed the process of natural selection, as resulting 
in the survival of the fittest. The chief form of this conflict is 
between the living being and the forces of nature, the struggle 
of the individual to accommodate himself to the environment, 
and the evolution under favorable conditions of those who 
survive by learning so to accommodate themselves. When 
nature is niggardly and her resources do not suffice for all, the 
struggle with nature is reinforced by a contest between the 
various groups or units to secure their share. It is here that 
competition emerges, — not a struggle against nature, but a 
conflict of one unit with another in order to enjoy the bounty 
of nature. 

It is a striking fact that the earliest form of competition 
is a group competition rather than an individual competition. 

139 



140 Competition [§60 

At all events, without going back to the beginnings of life, it 
is reasonably certain that the first competition found among 
human beings, as indeed is still the case with most animals, 
is the competition of one horde or pack with another in the 
endeavor to secure the means of subsistence. Thus from the 
very outset the principle of mutual aid emerges, and competi- 
tion between the groups is possible only because of co-opera- 
tion within the group. These early forms of co-operation are 
seen in the American frontier life when the neighbors come 
in to the "log-rolling," the "raising" of the building, the "husk- 
ing bee" or the "sugaring off" of the maple trees. With the 
development and differentiation within the group, the prin- 
ciple of natural selection, that is, of competition, makes itself 
felt as between the members of the group; but the process is 
slow because the welfare of the individual is deemed to be 
subordinate to that of the whole. ^^As the groups become larger 
and more powerful, we notice continually higher forms of mu- 
tual aid, but we find at the same time more play given to the 
activity, or, in other words, to the competition, of the individual. 
Finally, in historic times the competition between nations is 
decided not only by the character of the state, as the most de- 
veloped form of human co-operationj but still more by the 
results of the competitive struggle within the nation in develop- 
ing those qualities of body and mind on which political power 
ultimately rests. Competition in one form or another is co- 
terminous with life itself. 

If competition, as a biological conception, is thus an ex- 
planation, in part at least, of progress, it becomes of even more 
importance when applied to the economic domain. The sub- 
ject matter of economics is human relations to wealth. The 
difference between man and animals is not that man econo- 
mizes wealth (for some animals do the same), but that he pro- 
duces wealth. Competition therefore in human economics is 
not simply a contest to divide an existing sum, but a struggle 
to share in an increasing stock. The first requisite of secur- 



§ 6i] Forms of Competition 141 

ing an additional share is to produce more. In this struggle to 
dispose of the increased product to the whole body of consumers, 
the victory will lie with those that can create better or cheaper 
products. The surest method of capturing the market is to 
undersell one's competitor. Thus competition, as a business 
principle, means a struggle to augment wealth through a lower- 
ing of cost. If competition in biology leads only indirectly 
to progress, competition in economics is the very secret of 
progress. Under normal conditions competition is indeed the 
Hfe of trade. The individual competitor may incidentally 
amass a fortune, but if he does so honestly (and dishonesty is 
not an attribute of wealth, but of individuals, whether rich or 
poor), it can only be by conferring upon the community still 
greater benefits. He conquers who does best for society. 

Competition in economic life, therefore, is a potent factor 
in the growth of capital. Working hand in hand with the prin- 
ciple of private property, it is the chief incentive to progress. 
Through it we secure the extension of the margin of utilization, 
the accumulation of the surplus available for human wants. 
Competition, moreover, is the great safeguard of society. 
It is the protection of the consumer against the high price 
which accompanies exorbitant profits; for it is the automatic 
force which reduces the gains of the inefficient and makes 
profits depend on low, rather than on high, price. It evokes 
in individuals the fundamental characteristics of energy, thrift 
and power; and it harmonizes to a large extent the interests of 
the individual and of society, by making the success of one 
depend primarily on what he can accomplish for the other. 

61. Forms of Competition 

The chief forms of competition are five in number, — com- 
modity competition, individual competition, piarket competi- 
tion, class competition and race competition. 

(i) By commodity competition is meant the competition 
due to the existence of social choices. Every individual is 



142 Competition [§ 61 

continually debating with himself whether to purchase one 
commodity in preference to another. Where he is on the 
margin of doubt or of indifference the slightest alteration in 
the price will cause him to substitute something else. The 
principle involved is hence called the principle of substitution. 
The vendor must constantly be on the watch lest any increase 
of price cause the disappearance of his sales. We substitute, 
however, not only one thing for another, but also one agency 
of production for another: in the crucible of economic wants 
everything is finally tested by its capacity to afford the greatest 
satisfaction. Not only will the consumer choose now this and 
now that commodity, but the employer will increase now his 
labor force, now his stock of machinery, so as to secure the 
best results. The least change in the rate of wages or of in- 
terest may lead him to substitute the one for the other. It 
is only by replacing the less efficient by the more efficient 
factor that the producer is able to induce the consumer to 
select one commodity in preference to another. Competition 
of factors of production is thus really an adjunct to commod- 
ity competition. Competition through substitution is hence 

' important in that it fixes a maximum limit beyond which prices 
cannot go. Every economic factor, like every economic good, 
may be in either actual or potential competition with another. 

^he existence of competition, however, implies the mobility or 
free interchange of the factors of production from enterprise 
to enterprise and from commodity to commodity. When the 
fluidity of capital and the transferability of labor are complete, 
the competition is absolutely free. When there are hindrances 
to this mobility, we speak of economic friction. The substitu- 
tion of one commodity for another may be hindered by legal, 
social or economic causes. Under normal conditions, however, 
the competition ^s real and effective. 

(2) The competition of individuals with each other de- 
notes a rivalry, not between the producers of different com- 
modities or between the different factors of production, but 



§ 6i] Forms of Competition 143 

between the producers of the same commodity or the same 
factors of production. Under normal conditions competition 
here puts every one on his mettle, and success is a measure 
of the contribution to the social fund. The more a laborer 
produces, the higher his wages will be; the larger the output 
of a particular cotton mill and the lower the cost at which it 
can market its goods, the greater will be the benefit to the 
consumer as well as the advantage to the particular producer. 
Competition between individuals is in its results a struggle to 
enhance efficiency, to increase faculty, to multiply productive 
power, to augment ingenuity, in short, to develop economic 
personality. The more potent the personality, the greater will 
be the command over the powers of nature, the more rapid will 
be the development of the wealth which, although owned by 
individuals, yet inevitably ministers to the welfare of society. 

(3) By market competition we mean, not the competition 
of individuals in the market, but the competition of markets 
with each other. Market competition includes, indeed, both 
commodity competition and individual competition in the 
sense that in every market individuals as well as commodities 
compete with each other; but it is something over and above 
these. Every great city is continually striving to develop as 
a centre of distribution and exchange, in the well-founded hope 
that the wealth thus amassed will lead to productive efficiency 
in other lines. New York is competing with Baltimore for the 
grain trade; New Orleans with Galveston for the cotton trade. 
Competition between markets seeks to overcome the factor of 
distance, and lies at the root of the problem of modern methods 
of transportation. Here again market competition leads to 
reduced cost, and the struggle for market supremacy can be 
fought to a successful issue only through more effective service. 

(4) Class competition is the result of the differentiation of 
modern society into groups of producers. We have not only 
the great division into laborers and capitalists, but the further 
separation of the latter into the owners of agricultural, com- 



144 Competition [§ 6i 

mercial and industrial capital — that is, landowners, mer- 
chants and factory owners — and the still further subdivision 
of each class into minor groups. It pleases some writers, like 
the socialists, to erect this principle under the name of class 
conflict into the fundamental explanation of all economic change, 
and to regard it as involving not only the expropriation of 
the victim, but the ultimate downfall of society as well. In 
reality class competition, while as inevitable as the other forms 
of competition, is within proper bounds just as beneficial. 
Under a system of free competition capital will flow into in- 
dustry in preference to agriculture only when industrial pur- 
suits are more productive, that is, when the community as a 
whole sets more store by the products of industry. Whether 
the moneyed interest or the landed interest is more prosperous 
depends at bottom upon their success in making converts 
among the consumers, and the extent of conversion depends 
on what they can offer in the way of lower prices or better 
products. The laborers and the capitalists again represent 
competing interests, but the share of each in wages and profits 
depends ultimately, as we shall see, on their relative contribu- 
tion to the common product. 

(5) Race or national competition in its economic aspects is 
the final form of the modern struggle. The most marked 
characteristic of recent progress is the gradual substitution of 
peaceful rivalry of commerce for the sanguinary clash of arms. 
The modern weapon is not the javelin or the rifle, but the 
enterprise of the domestic producer aided by the exporter. 
Every nation that has reached commercial or industrial matu- 
rity endeavors to seek in the foreign market a profitable outlet 
for its own surplus productions. This attempt to secure a 
market is indeed responsible for an occasional war. In the 
main, however, the struggle to-day is one for cheapness, and 
in the end it is not the large army or navy but the most effi- 
cient producer that permanently retains the neutral market. 
It is not to be denied that both a large army and a large navy 



§62] Dangers of Competition 145 

may be needed to protect the commercial or other national 
interests; but the foundation of military greatness in modern 
times is primarily economic, and when economic efficiency 
has disappeared, military strength must also disintegrate. 
Great nations are now judged, not by the numbers of their 
battalions or ships, but by the volume of domestic production 
and foreign trade. Economic power represents potential mili- 
tary capacity. Here, again, national competition is salutary. 
The fundamental error of the old mercantilistic doctrine was 
the belief that what one nation gains in trade, the other neces- 
sarily loses. The modern doctrine is that every nation is 
helped by the prosperity of its neighbor, on the principle that 
the more wealthy the customer the greater will be his pur- 
chases. Both nations may gain, although one may gain more 
than the other. The foreign markets can be retained only by 
underselling; the profits of one country can be secured only 
by conferring these advantages on the consumers of the others. 
National competition, like personal and class competition, can 
benefit the individual country only by benefiting the group; 
it enriches one nation, but incidentally develops the others. 

62. Dangers of Competition 

In describing the essential beneficence of competition in its 
various forms, we must not blind ourselves to its shortcomings. 
Some of these evils are inevitable. Where there are a contest 
and a victor, there must be a victim. There can be no strug- 
gle without some pang to the conquered. Suffering is an 
accompaniment of progress, just as sacrifice, at least in the 
sense of effort, is a prerequisite to enjoyment. In the animal 
world, where the sway of competition is relentless, the evil is 
pronounced. Progress there is purchased by the death of the 
victim. The fight is one of bestial instincts and brute powers, 
— the victory, however beneficial to the race, is secured at a 
tremendous sacrifice. Human competition, on the other hand, 
has in its economic form, as we have seen, something in com- 
10 



1 46 Competition [§ 62 

mon with, but also much in contradistinction to, brute compe- 
tition. Economic competition may indeed involve the economic 
death of the unsuccessful competitor. The producer who is 
undersold by his rival will ultimately be compelled to abandon 
the field. His adversary's success, which means progress for 
the consumer, spells his ruin. 

There are, however, two points in which brute and human 
competition are unlike. In the first place the economic de- 
feat may be only temporary. The producer who has failed 
in one business, often succeeds in another for which he is better 
fitted. His original failure may be the means of redoubled 
efforts and final victory elsewhere. His downfall is not nec- 
essarily his end, but may be his real beginning. In the second 
place, in economic competition there may be no death at all, 
but only a relative defeat in the sense that the progress of both 
competitors is unequal. Laborers compete with capitalists, 
one country vies with another; both may continually gain, 
even though in different proportions. In brute competition 
the struggle is only for consumption; in human competition the 
contest takes the form of production. In the end, indeed, the 
goal of both is enjoyment; but the means of reaching the end 
are different. This difference renders possible a participation 
by both contestants in the gains of production that are caused 
by economic competition. 

Even with these qualifications, however, competition is often 
a painful process, none the less painful because the struggle 
has been transferred from the arena of bodily strength to that 
of mental capacity. The competition, moreover, may some- 
times become so fierce that for a time at least it exhausts the 
powers of both competitors. This is the "cut-throat competi- 
tion" of which we have heard so much in recent years, when, 
in the effort to capture the market, prices are reduced below the 
cost of production. The temporary advantages to the con- 
sumer are dearly purchased through the ruin of all the pro- 
ducers. Here we see competition at its worst, because all 



§ 63] Limits of Competition 1 47 

competitors are pulled down to the level of the most unscrupu- 
lous. In the same way there may be excessive competition 
between laborers, as when the necessities of the laborers com- 
pel them to accept the standard of the worst-paid or hardest- 
worked laborer. In the one case as in the other this unfair 
competition endangers the perpetuity of a successful business 
or of a prosperous working class. The question then arises as 
to whether it is not possible to conserve the chief advantages 
of competition and at the same time to lop off some of its ex- 
crescences; to maintain the social benefits while minimizing 
the individual costs. In other words the question is: what 
are the real limits of competition? 

63. Limits of Competition 

The problem may be approached from three points of view, 
— the level of competition, the maintenance of equality and 
the existence of quasi-public enterprises. 

(i) The fundamental distinction between brute and human 
competition, underlying all the others that have been men- 
tioned, is the point with which we have become familiar, namely, 
that while animals are governed by their environment, man, 
to a certain extent at least, can alter his environment. This 
is true not alone of the physical, but to a much greater extent 
of the socio-economic environment. The function of society 
is to raise the general plane of competition. Even in that 
extreme form of competition known as war, international agree- 
ments have succeeded in preventing a certain amount at least 
of wanton injury and needless suffering, without in any degree 
impairing the real intensity of the conflict. It is no longer 
true that "all is fair in love and war." In economic life, simi- 
larly, we often hear of unfair or cut-throat competition, with 
the implication that unworthy and reprehensible measures 
are being employed. With the development of business life 
there has been a continual movement away from the early 
brute-like struggle. The community to-day is frequently con- 



148 Competition [§63 

trasting "fair" with ''unfair" competition. Not only does the 
idea of what constitutes a "fair" competition change from age 
to age, but it differs at the same age in different occupations. 
jThe practices of our railways are very different from what they 

/were a generation ago. The professional ethics governing the 
competitive charges of a lawyer or a physician scarcely resemble 
those of a tradesman. The code of business morals is not 
the same in Wall Street as in Wojth Street; the competition 
of farmers is often conducted on a different level from that 
of factory owners. Each group has its own standard, and the 
average man is satisfied if he conforms tOi»it. The object of 
all progress is to elevate this standard and to give a continu- 
ally broader interpretation of what is economically "fair." 
Conformity to the standard, however, involves some interfer- 
ence with individual liberty. , Through the force of public 
opinion, reflected in business usage or legislative enactment, 
competition is being made to assume a higher form. Dishon- 
esty is frowned down, factory laws are enacted, the scab and 
strike-breaker are reprobated, unscrupulous financiering is pun- 
ished. Competition is not destroyed, but its level is raised. 

(2) The second consideration is that of equality. Perfect 
equahty indeed does not exist, since variety is the law of life. 
Competition does its work, in the economic as in every other 
field, precisely by giving the victory to the better equipped. 
When the disparity between the competitors, however, is enor- 
mous, the community often fails to reap the essential benefits of 
competition. If one individual can produce a commodity for 
ten cents, and if it costs his sole competitor fifty cents, a sell- 
ing price of forty-five cents will give him the command of the 
market; whereas with a more capable group of competitors he 

. might be compelled to reduce the price to fifteen cents. The 
greater the equality between the competitors, the more sub- 
stantial are the gains to the consumers. If the producer can 
in some way be rendered more efficient, so that the disparity 
will diminish, to that extent the community will gain. This 



§63] Limits of Competition 149 

is also, as we shall see, the principal argument in favor of the 
regulation of international competition through a protective 
tariff. In the same way the demand for a minimum wage 
and some of the other legitimate practices of trade-unions 
are intended to bring the weakest nearer the standard of the 
strongest. In its best aspects it is a levelling up, rather than 
a levelling down. 

The point to be emphasized is that the strengthening of a 
weak competitor may redound to the advantage not only of 
the coftipetitor himself, but to that of the whole group, and 
ultimately to that of the community. Competition remains, 
but is rendered less unequal. Here, as elsewhere, indeed, 
there is always the danger that the community may suffer 
more from the restriction on the strong than it gains from the 
advantage to the weak. This, however, is the danger of all 
democracy, which must be guarded against in other ways. 

(3) The third point is the existence of quasi-public enter- 
prises. Shortly after the so-called ''merger decision" of the 
Supreme Court in 1904, in which the Northern Securities 
Company was declared illegal, a noted lawyer stated publicly 
by way of criticism that no one any longer believed in the old 
adage that "competition is the life of trade." This remark 
rested upon a confusion of thought. Competition of a certain 
kind between railways is certainly not the life of trade. But 
why? Railways, like some other media of transportation and 
transmission of commodities, intelligence and power, differ 
from ordinary commercial enterprises in that they are quasi- 
public in nature. They carry on enterprises in which the 
public interest is so commanding that it must not be subordi- 
nated to private profit. In ordinary private business buyers 
and sellers make their individual bargains with each other; 
and while, as we shall see, open competitive prices tend to 
uniformity, there is nothing to prevent the more powerful or 
the more favored purchaser from secretly securing a lower 
price. Much of the profit of the business man, indeed, con- 



150 Competition [§64 

sists in this skill in purchasing on favorable terms; the very- 
essence of usual business practice is this system of different 
prices to different customers. It is pr.ecisely the attempt on 
the part of railways to pursue this same policy which has cre- 
ated the "railway problem" in the United States. It is now 
recognized that the railway has no more right to make per- 
sonal discriminations between its customers than has the 
government post-office. The wealthy merchant cannot buy 
postage stamps cheaper than his smallest competitor; he ought 
not to be able to secure more favorable freight facilities^ Com- 
petition in ordinary business means the different treatment 
of individuals, and is beneficial; competition in railway rates 
means discrimination between shippers^ and is reprehensible. 
Competition in ordinary prices is the soul of trade; competi- 
tion in railway rates is the death of legitimate trade. The 
only kind of competition that is desirable in quasi-public enter- 
prises is the competition of service and of facilities. 

Competition therefore is a force that must not be abused. 
It is applicable only in a slight degree to certain kinds of busi- 
ness, it works most beneficially in the presence of comparative 
equality, and its level of action stands in need of a continual 
elevation. Within these limits, and with these conditions, it 
is a vital and salutary force. 

64. Substitutes for Competition 

As opposed to competition there are three possible regula- 
tors of economic phenomena, — custom, co-operation and 
monopoly. 

(i) Custom at one time played a far greater role than it 
does to-day. In the more immobile communities of the Orient, 
as well as in the early middle ages of Europe, society was largely 
governed by status rather than by contract. People were 
born into certain conditions and occupations, and to emerge 
from these was difficult or impossible. In the rigidity of the 
Indian caste system we see the highest development of custom. 



§ 64] Substitutes for Competition 151 

Prices also were largely customary prices; the entire mediaeval 
conception of justum pretium centred in the attempt to enforce 
the customary price. Capital was to a great extent fixed in 
land, and thus immobile; labor was not permitted to shift at 
will from place to place or from trade to trade. Nevertheless, 
even in the stage of the customary economy competition was 
not entirely absent. At bottom values were far more depend- 
ent upon the working out of subtle and masked competitive 
forces than is usually conceded. To-day custom still plays a 
perceptible although fast-dwindling role in the determination of 
some economic phenomena. Even in the backward and primi- 
tive sections of our country the storm and stress of modern com- 
petitive life are making rapid inroads. The economic theory of 
industrial society now rests on competition, not on custom. 

(2) Co-operation is in some aspects the opposite, but in 
others the corollary, of competition. We have seen that from 
the very beginning there was mutual aid within the group, in 
order the better to carry on the competition between the groups. 
There is even to-day no competition within the family, although 
a very lively competition between families. So in the same 
way the stockholders of a corporation co-operate, in order the 
more effectively to compete with another corporation. There 
are in fact all kinds of associations, voluntary and compulsory, 
including church and state, which fill out modern social life 
and which have more or less economic influence, working in 
perfect harmony with the struggles of the market. This kind 
of co-operation is compatible with competition. 

Co-operation in its technical sense, however, means the 
abandonment of competition in distribution and in production. 
In distributive co-operation, the customers who are members 
of the co-operative societies select one of themselves as man- 
ager of the store and share any resulting profits. As they are 
expected to make no purchases elsewhere, there is no compe- 
tition. Such co-operative stores are found principally in Great 
Britain. They have never flourished in America because they 



152 Competition [§64 

have been unable to supply the commodities as cheaply as the 
great department stores. In productive co-operation the ob- 
ject is to eliminate the capitalist and to remove competition 
between the workmen. The laborers elect one or more of their 
number to control the enterprise, and divide among themselves 
the gains. Co-operative production has achieved some notable 
triumphs in both Europe and America, but as we shall see (§ 183), 
its scope is exceedingly restricted, and there are great obstacles 
to its general adoption as a substitute for competition. 

(3) While co-operation implies an abandonment of compe- 
tition either between consumers or between laborers, there is 
a third form of co-operation which implies abandonment of com- 
petition among capitalists or managers of business. This is 
usually called combination. If the combination is incomplete, 
however, it is still subject to the force of competition; if it is 
complete, it has become a monopoly. Monopoly therefore is 
the ultimate outcome of the cessation of business competition. 

Monopoly has existed in many forms, and there are accord- 
ingly several categories of classification. Monopolies are either 
private or public, and public monopolies are either fiscal or 
social. /Fiscal monopolies are enterprises conducted by gov- 
ernment for fiscal reasons, like the salt or tobacco monopoly 
abroad. Social monopolies are enterprises conducted by gov- 
ernment primarily for social reasons, like the federal post- 
office, or the South Carolina dispensary system. Private 
monopolies, on the other hand, are of three classes, — per- 
sonal, labor and capital monopolies. Personal monopolies rest 
upon natural talent; a great actor or musician is in a class by 
himself. Labor monopolies rest upon labor organization and 
affect chiefly the employer, although indirectly the public. 
Capital monopolies are the ones with which the consumer in 
general usually comes into contact. 

Capital monopolies, finally, are of four kinds, — legal, natural, 
franchise and ordinary business monopolies, (i) Legal mo- 
nopolies were at one time common, through grant of the mon- 
arch to favorites. They are to-day found only in the restricted 



§64] Substitutes for Competition 153 

form of patents and copyrights. (2) Natural monopolies are 
those which depend on natural location, as in the case of certain 
specially favored lands, mines or waters. (3) Franchise monop- 
olies take the form of quasi-public enterprises like railways, 
telegraph and telephone companies, gas, water and electric 
light companies, whose profitable operation depends on the grant 
of a franchise to use the public highways, on, above or below 
the surface. Strictly speaking, they might be classed as a sub- 
division of natural monopolies. Here experience shows that 
competition is in the long run impossible and undesirable, either 
because, as in the case of railways, it leads to discrimination, 
or because, as in the case of the so-called municipal monopolies, 
it leads to an unendurable interference with the streets or an 
unnecessary duplication of plant. (4) Ordinary business mo- 
nopolies, finally, cover the great mass of modern enterprises 
known as trusts, and as to the essential monopolistic character of 
which there is room for doubt, as will be explained later (§ 148). 

It is clear that private monopoly is a satisfactory regulator 
of price only in personal monopolies, where the consumer is 
glad to recognize and to foster exceptional talent, as well as in 
patents and copyrights where society is willing for a time to 
forego the advantage of competition for the sake of stimulat- 
ing invention, and thus ultimately reaping the benefits. In 
all other cases of private monopoly, the consumer is to a cer- 
tain extent at least left defenceless. Where there is no reliance 
upon competition, recourse must be had to some form of legis- 
lative control. Unregulated monopoly can therefore only in 
most exceptional cases be a substitute for competition. 

Competition hence remains the permanent and controlling 
force of economic society. It is not all pervasive or uniformly 
advantageous. But in its fundamental aspect it hes at the root 
of progress, and when stripped of its excrescences and applied 
under proper limitations it is as beneficent as it is widespread. 
In the complex society of the present day, however, the limi- 
tations on the principle often assume almost as much impor- 
tance as the principle itself. 



CHAPTER XI 
FREEDOM 

65. References 

H. J. Nieboer, Slavery as an Industrial System, 2d ed., (1910); J. K. 
Ingram, History of Slavery and Serfdom (1895); J. E. Cairnes, The Slave 
Power (1862); T. H. Green, Liberal Legislation and Freedom of Contract in 
Works (Nettleship's ed., 1888), III; J. F. Stephens, Liberty, Equality 
and Fraternity (1873); H. C. Adams, Economics and Jurisprudence (Am. 
Econ. Assoc, Economic Studies, II, 1897); R. T. Ely, Property and Con- 
tract (1914), pt. ii, ch. viii, ix; A. T. Hadley, Freedom (1903), chs. iii, iv, 
vi; E. Kelly, Government (1901), II, bk. i, ch. v; J. S. Nicholson, Principles, 
bk. v., chs. ii, iii, and Strikes and Social Problems (1896), chs. iv, vii; J. S. 
Mill, Principles (1880), bk. v, ch. x; S. and B. Webb, Industrial Democ- 
racy (1904), part 3, ch. iv, and Problems of Modern Industry (1907), ch. 
x; D. G. Ritchie, The Principles of State Interference (1896); G. G. Groat, 
Attitude of American Courts in Labor Cases (1911), ch. xi; Commons and 
Andrews, Principles of Labor Legislation (1916). 

Immigration : J. R. Commons, Immigration and its Economic Effects 
(Indust. Commiss. Report, XV, 1902); J. W. Jenks and W. J. Laucks, 
The Immigration Problem (igi 7); Report of the Immigration Commission 
(42 vols., 1910-1912); H. J. Fairchild, Greek Immigration to the U. S. 
(191 1) and Immigration (1913); P. R. Hall, Immigration (191 2); I. A. 
Hourwich, Immigration and Labor (191 2); Mary R. Coolidge, Chinese 
Immigration (1913); F. J. Warne, The Immigrant Invasion (1913). 

66. Origin and Growth of Slavery- 
Industrial liberty, like private property, is the result of a slow 
evolution. The ordinary picture of the freedom of the un- 
tutored savage is as fanciful as the rest of the fairy tales of our 
youth. Primitive man lacked freedom in three ways: he was 
in abject dread of nature, of his stronger comrades, and of the 
social group. In his ignorance of natural phenomena he was 
a prey to all kinds of fear and superstition and an easy victim 
of the sorcerer or medicine man. Living in a society based on 

154 



§ 66] Growth of Slavery 155 

brute strength, he was at the mercy of the more stalwart savage. 
Dependent, as we have seen, on the horde or clan for existence, 
he was hemmed in by social customs that could not be in- 
fringed and by group prohibitions which it would be folly to 
evade. Civilization, and not primitive nature, is the creator of 
liberty. Knowledge has emancipated man from superstition, 
law and order have protected him from the oppressor, social 
progress has evolved in every phase of life a sphere of liberty, 
ever more secure from the encroachments of absolutism. Eco- 
nomic liberty like political liberty, freedom of thought like 
freedom of speech, are the product of the most advanced stages 
of society. 

The freedom which is of special concern to the economist is 
of two kinds: bodily freedom as the basis of all labor, and 
freedom of economic action apart from control of one's own 
labor. The first involves personal liberty in the narrower sense 
and leads to a study of slavery. The second comprises a num- 
ber of phenomena to be discussed in § 69. We take up first 
the subject of slavery. 

The origin of slavery has until recently been much mis- 
understood. It is commonly stated that there are four causes 
of slavery: conquest, debt, crime and birth. Slaves, we are 
told, were recruited from the victims of war; from the ranks 
of those that voluntarily sold themselves or were unable to dis- 
charge their debts; from the criminals who earned a punish- 
ment only short of death; and from the offspring of existing 
bondmen. This statement is accurate enough, but it sheds no 
light on the real problem of the origin, the spread and the 
decline of slavery. 

Slavery is obviously an institution designed to secure the 
services of others by force. It presupposes the need of labor 
on a moderately large scale. In the earliest stages of society 
well-nigh the only work done by man consists of hunting and 
fishing, each in itself to a great extent a pleasurable activity. 
Every member of the community concerns himself with such 



156 Freedom [§ 66 

work, and there is neither need nor room for compulsory labor. 
It is only when private property develops that we find the 
beginnings of slavery. In exceptional cases we can trace pri- 
vate property and intertribal barter among fishing groups, as 
in some of the Indian tribes on the North Pacific coast. Here 
the slave is utilized to a certain extent in work connected with 
fishing and in domestic labor. In general, it may be said that 
slavery can exist in the primitive economic stage only when 
subsistence is easy to procure without the aid of capital. When 
this condition is lacking, as among the Australians as well 
as among the great mass (although not all) of the American 
Indians and the Eskimos, slavery is unknown. 

As we have seen, however, private property acquires social 
importance only with the pastoral stage. The slave can now 
be employed as the cowherd, the swineherd, the shepherd. 
The patriarchal family develops, and the slave becomes an in- 
tegral part of the family group. Slavery, however, is still rela- 
tively insignificant. Even large flocks and herds can be tended 
by a few herdsmen, and the existence of a great mass of poverty- 
stricken freemen renders recourse to slaves unnecessary. The 
accumulation of large numbers of domestic slaves, moreover, 
is prevented by the exigencies of a roving existence. 

When we come to the agricultural stage, the conditions 
change. Cultivation of the soil is arduous, and yet with an 
adequate force of laborers it is profitable. On a given plot of 
land every additional laborer means up to a certain point an 
increased yield; the existence of settled habitations renders 
possible the employment of domestic servants in various capaci- 
ties. The more slaves, the more wealth and the more ease for 
the slave owner. 

In the early stage of the agricultural period slavery is still 
relatively inconspicuous. After the immediate needs of the 
master and his family have been met there is little use for 
additional laborers. It is only with the growth of barter and 
the increasing possibility of surplus products that it becomes 



§ 66] Growth of Slavery 1^7 

proiitable to augment both one's land and one's slaves. In 
other words, a market for agricultural production must develop, 
and the landed estates must be managed as business enter- 
prises. Slavery becomes highly lucrative, and on the great 
estates there is now such a diversified activity that large num- 
bers of slaves are employed not only as domestics but in all 
kinds of industrial work. Thus in Rome the development of 
slavery on an extended scale did not take place until the later 
centuries of the republic, when slavery on the latifundia became 
the dominant form of great business enterprise. In the same 
way slavery became an important factor in America only when 
the cultivation of tobacco and later of cotton on a considerable 
scale for the foreign market made the labor of slave gangs 
profitable. 

It will be observed, however, that in addition to the exist- 
ence of a market one other factor is necessary to the spread of 
slavery. This is a supply of free land. It is only when there 
are large tracts of virgin and unoccupied soil that slavery be- 
comes at once lucrative and, from the point of view of the 
landowner, necessary. It is obvious that if any one can occupy 
and till on his own account a plot of land he will not volun- 
tarily work for others, except for a remuneration so large that 
it will exceed what he himself can raise from the soil. The 
landowner who cannot secure voluntary assistance except on 
what he regards as ruinous terms resorts to forced labor. As 
long as there is a boundless expanse of good land available, 
slave labor, which implies a superficial cultivation, is still eco- 
nomical. It pays better to bring fresh land under the plough 
than to put more effort into old land; it is more profitable to 
increase acreage than to redouble effort. Even when the land 
becomes poorer through an exhaustive culture, slavery is still 
profitable in the older sections, not so much for the raising of 
produce as for the raising of slaves to be sold to the newer and 
more distant lands. To the landowner it is immaterial whether 
he secures his wealth from the produce of land or of slaves: as 



158 Freedom [§67 

long as the supply of fresh land maintains the value of slaves, 
their increasing numbers will counterbalance the decreasing 
fertility of his land. Finally, when slavery has become the 
dominant factor in production, it is profitably employed not 
only in agriculture, but also in industry. 

Thus in classic Greece slavery developed with the growth of 
intermunicipal markets, and grew strong with the expansion of 
the colonies on all sides of the Mediterranean. The great 
city-states became not only the chief marts but also the chief 
breeders of slaves, and slavery finally dominated industry as 
well. With the advent of Roman sovereignty slavery received 
a new lease of life, and became lucrative not only on the Italian 
mainland but in the great stretches of subjugated states. As 
long as the career of conquest and fresh accessions of territory 
continued, slavery flourished. In the same way the European 
immigrants into the new world, whose ancestors had just seen 
the last vestiges of forced labor disappear at home, no sooner 
reached American soil than they introduced in all its rigor the 
ancient system of slavery. If the system dominated only 
agriculture and not industry, it is to be ascribed to the fact 
that a controlling industrial civilization had, for reasons to be 
noted in a moment, evolved from the stage of slavery to that 
of freedom, first in Europe as against the colonies in general, 
and then in the North as against the South. It was cheaper 
for the South to buy its industrial products in the free North 
or in Europe than to make them herself. 

67. Decay and Disappearance of Slavery 

To the same cause, the conditions of supply of fresh land, 
must we ascribe the decay and the final disappearance of 
slavery. When the supply of new land diminishes, the eco- 
nomic disadvantages of slavery make themselves apparent. 
As Cairnes pointed out, there are three defects in slave labor: 
it is given reluctantly, it is unskilful, it is wanting in versatility. 
As long as there is an ample supply of exuberantly fertile soil, 



§67] Decay of Slavery 159 

superficial cultivation suffices. But with every decade's culti- 
vation of the same plot the productivity suffers and the need 
of more unremitting labor appears. The landowner now finds 
it to his interest to mitigate the rigors of slavery and by per- 
mitting the cultivator to do some work on his own account to 
induce him to labor somewhat more strenuously for his master. 
The slave in Rome gradually turns into the colonus, just as 
several centuries later the Anglo-Saxon thegn is replaced by 
the villein, — the slave by the serf. Serfdom differs from 
slavery chiefly in that the individual acquires certain personal 
rights and is attached to the soil. He goes with the land, but 
cannot be divorced from it. The serf is still bound to work a 
certain part of his time for the landlord. With the final ex- 
haustion of free land, however, the landlord finds that he can 
derive more profit by freeing the serf completely and by letting 
him occupy the land on a fixed rental, in produce or in money. 
This process is gradual, differing according to the general 
economic conditions of each country. Ultimately, however, 
the last trace of serfdom disappears, and the cultivator be- 
comes the hired man or the free tenant farmer. 

There are generally five steps in this transition from slavery 
to liberty: (i) the acknowledgment by the master of certain 
personal rights on the part of the slave; (2) the grant to the 
slave of certain property rights, as the privilege of the Roman 
slave in later times to acquire a peculium or independent fund 
by working in his leisure moments for himself; (3) the confer- 
ring of the privilege of marriage, whereby the master abdicates 
the right of breeding human beings like animals; (4) the manu- 
mission of the slave, while reserving certain partial rights to 
his services; (5) complete emancipation and commutation of 
all services into a fixed money rental. 

The transition from slavery to serfdom and from serfdom to 
freedom can be traced in Western Europe, where the increase 
of population and the resulting diminution of fresh land forced 
the adoption of better methods of cultivation. The process 



i6o Freedom [§ 67 

was accelerated by the growth of a free industry and com- 
merce in the towns; and although temporary mutations caused 
the landowners here and there to resist emancipation, serfdom 
was finally abolished, either because it was no longer really prof- 
itable, or because the community now recognized the greater 
need and value of the free industrial workman. In the first 
case, as in England, serfdom died a comparatively quiet death; 
in the second case, as on the Continent, where the landowners 
were more tenacious of their rights, it needed a revolution to 
bring about the disappearance of the last traces of serfdom. 

In America, where at first only the fringe of the arable area 
was occupied, the resulting inability to secure an adequate 
labor force through free workmen, apprentices or redemp- 
tioners soon led to the adoption of slavery, first of Indians, 
then of negroes. In the Northern states, where the land was 
poor and a better cultivation necessary, slavery never took a 
deep hold except on the plantations of Narragansett Bay and 
of the Hudson valley. In the South both climate and soil 
made slavery profitable. As the seaboard lands became poorer, 
the continuance of slavery depended on the continual acquisi- 
tion of fresh lands, — a fact that led to the Mexican war and 
the attempts to secure Cuba. The opening of the lower Miss- 
issippi valley so augmented the price of slaves that not only 
the older seaboard states, but even many of the hill sections 
of the interior commonwealths where slavery would never 
have developed of its own accord, now found it to their inter- 
est to raise slaves for the market; and from that time the 
entire South was practically a unit in favor of the "peculiar 
institution." The South was forced into the conflict because 
it well realized that without fresh supplies of land slavery was 
doomed. 

Emancipation came as a war measure; but even without 
emancipation at that time slavery would soon have disappeared. 
Left to itself, without any chance of territorial expansion in 
the presence of a more vigorous and free industrial system, 



§67] Decay of Slavery 161 

slavery would slowly have become unprofitable, and would 
have changed into some form of serfdom to be ultimately merged 
into the more remunerative system of freedom, Lincoln's 
proclamation, like the Czar's ukase of the same decade, accom- 
plished by a stroke of a pen what it had taken Western Europe 
centuries to attain. In America the transition was an economic 
revolution, in Russia a reform, because in the one country 
slavery, and in the other serfdom, was abolished. In both 
cases the change in the law only slightly anticipated the in- 
evitable result of a fast-approaching change in the economic 
facts. 

The disappearance of slavery is therefore not due primarily 
to moral teachings. The greatest moral philosophers of Greece 
defended slavery because they could not conceive of a social 
system without it; the clergymen of the South honestly ap- 
pealed to the Bible because in their opinion it was necessary 
to social stability. The ethical defects of slavery were men- 
tioned by many Roman writers, but it was not until its eco- 
nomic shortcomings were realized by teachers and public alike 
that slavery disappeared. The civil war was indeed borne 
on the waves of a great moral uprising, but human nature in 
the North was no different from that in the South, and had the 
climatic and economic conditions of the North been like those 
of the South, there would have been no such moral uprising. 
A higher morality, it is true, continually transforms social life, 
but in order to accomplish lasting results it must be in intimate 
touch with the great underlying economic facts. 

With the virtual exhaustion of free land, slavery in modern 
society has gone, never to return. It is only in a few of the 
tropical colonies where land is still abundant that there is any 
possibility of its continuance; and if the colonies did not form 
so relatively insignificant an appendage of modern industrial 
states, the possibility might become a probability. It is un- 
likely that we shall see anything more severe than the carefully 
regulated contract labor of some of the English possessions. 
II 



1 62 Freedom [§67 

Even here, however, as well as m the case of the "culture" 
system of Java and the peonage of Spanish America, care must 
be taken not to permit a relapse into a state of virtual serfdom. 
Slavery and serfdom have been defended on five grounds, 
(i) It is claimed that slavery is preferable to cannibalism; that 
it is a great advance to spare the victim rather than to eat him. 
It is forgotten, however, that when the great development of 
slavery came, the enslaving part of mankind had long passed 
out of the cannibal stage. (2) It is contended that slavery 
protects labor, and that in the middle ages, for instance, pro- 
tection was more important than freedom. This is, however, 
an assumption which from the point of view of the workman 
cannot be proven. (3) It is said that slavery inculcates the 
habit of work. There is no doubt that some of the negroes 
were drilled into comparative thrift and orderliness in the 
South. But this 'assumes that nothing else would effect the 
same result, — an assumption belied in all countries where 
free labor has developed independently. It also forgets that 
some of the negroes came from tribes where work was by no 
means unknown. (4) It is asserted that slavery permits the 
evolution of a leisure class. This, again, is based on aristocratic 
postulates. It completely ignores the possibility of a demo- 
cratic development where leisure and culture will no longer be 
the possessions of a favored few. (5) Finally, it is claimed 
that compulsory labor is necessary for the economic progress 
of countries where the natives will not work. This argument 
overlooks the fact that the ultimate end of economic progress 
is man rather than wealth, and that every resource of modern 
civilization in the line of industrial and technical education 
must first be exhausted before the claim can be admitted. 
Labor is indeed necessary for economic progress, but a so- 
called progress which rests on the perpetual exploitation of 
the laborer is not worth having. Slavery, whether total or 
partial, exerts its pernicious and insidious influence on slave 
and slaveholder alike. The modern conscience refuses to 



§68] Economic Liberty 163 

permit it, and fortunately the economic facts are almost 
everywhere in harmony with the modern conscience. These 
economic facts rest on the disappearance of free land. 

68. Liberty of Economic Action 

While bodily freedom is thus the result of a slow develop- 
ment, the liberty of economic action in general is also a recent 
product. Economic liberty of both kinds has been evolved 
because it has been recognized as conducive to wealth and 
general progress under modern conditions. As opposed to 
the theories of ancient and mediaeval absolutism, with its con- 
tinual interference in the economic life of the individual, the 
' modern doctrine is that a man may commonly be depended 
upon for utilizing his opportunities and turning his energies to 
the best account; that an adult of sound mind usually knows 
what is most advantageous for him, and that in making the 
most effective use of his own abilities he will ordinarily do the 
best for the community. It involves the substantial identity 
of private interest and public welfare, and it is to-day almost 
everywhere in the civilized world either an accomplished fact 
or a cherished ideal. 

If we look more closely, however, we shall find that free- 
dom is more than the mere absence of restraint or interference. 
In contrast to this mere negative conception of liberty, as 
advanced by Spencer and adopted by the average man, we 
must put the positive conception as framed by Green and 
elaborated by recent thinkers. Economic freedom, like all 
liberty, is not an attribute of primitive man, but has been ham- 
mered out by centuries of toilsome effort. Individual liberty is 
the product of social effort. If it is to be a constructive rather 
than a destructive force, if it is to minister to social progress 
rather than to social dissolution, it must be accompanied by 
two other conditions. 

Of these the first is equality. By equality we do not mean 
absolute equality. A certain degree of inequality inheres in 



164 Freedom [§68 

the nature of things. Men are born with an inequahty of 
physical, mental and moral attributes which no amount of 
care can eradicate; and as soon as private property develops, 
these natural inequalities inevitably produce their results in 
inequality of possessions. The real equality that is important 
for economic purposes is threefold: first, legal equality, or the 
certainty that one man is as good as another before the law, 
and that his economic rights will be equally protected; sec- 
ondly, equality of opportunity, in the sense that no man is shut 
out by legislation or social prejudice from free access to any 
vocation or employment for which he deems himself fitted; 
thirdly, such a relative equality, at least in the conditions of 
bargaining, as not to put one party to the contract at the vir- 
tual mercy of the other. Without such a threefold equality 
freedom becomes illusory; for liberty based on gross inequality 
means the liberty of the stronger and more unscrupulous to 
impose his will on the weak. Liberty without equality is the 
power of the one, but the subjection of the other. The liberty 
to invest one's capital in slaves was stoutly defended by the 
ante-helium Southerner, but his liberty involved the other's 
slavery. 

In addition to equality the growth of competition and the 
complexity of modern economic life have brought into promi- 
nence a second condition of liberty. The enormous power 
exerted to-day by the accumulations of capital as well as by the 
combinations of labor is in the present state of human devel- 
opment peculiarly susceptible of abuse. These abuses may be 
within the margin of the law, and yet none the less socially 
reprehensible. Unless great power is tempered by responsi- 
bility, it is apt to run wild. We are beginning to hear of the 
responsibilities of wealth, but the adage noblesse oblige applies 
to all forms of economic power, whether represented by wealth 
or not. What is needed, and what is gradually being devel- 
oped, is the sense of social solidarity; in other words, the con- 
viction that no one can really dissociate himself from the wel- 



§ 69] Kinds of Economic Freedom 165 

fare of his neighbors, and that his every action must be judged 
by its influence on society at large. It was this idea that found 
vague expression in the "fraternity" of the French revolution; 
it is the same idea that is again more forcibly advanced to-day 
under other names. The application in the economic sphere 
is no less valid than in others. Liberty without responsibility 
is license. 

Real economic liberty, therefore, is constructive in that it 
implies not simply an absence of restraint, but such a positive 
complex of conditions, resting on law and custom, as to insure 
to the greatest possible number the opportunity of a free de- 
velopment of their faculties. Liberty, when based on equality 
and responsibility, means wealth for the individual and prog- 
ress for society; liberty without equality and responsibility 
may mean advance for the few and retrogression for the many. 
Liberty as a negative concept is disruptive; liberty as a posi- 
tive concept harmonizes society and the individual; the one is 
a menace, the other an aid, to lasting economic progress. 

69. Various Kinds of Economic Freedom \ 

(i) The first and most obvious form of freedom is that of 
marriage and divorce. Marriage indeed is far more than an 
economic contrivance, even though the historical forms of 
marriage have been influenced by economic forces to a greater 
extent than is commonly recognized. Freedom of marriage 
especially is a product of the modern economic life. Restric- 
tions on the right of marriage were in the middle ages an attri- 
bute of personal subjection, and were utilized as fiscal resources 
by the lord. Even with the advent of physical freedom, how- 
ever, we find the right of marriage dependent on certain prop- 
erty qualifications, as in Southern Germany at the beginning 
of the nineteenth century. This also was merely a survival 
of aristocratic traditions, — like the still existing property 
qualifications for marriage in the case of army officers in con- 
tinental Europe. Freedom of divorce, on the other hand. 



1 66 Freedom [§69 

existed in early society, but was at first based on inequality. 
After the patriarchal and modern family had been constituted 
the husband could divorce the wife, but not vice versa. The 
newer right of divorce which rests on equality is in large meas- 
ure the result of the economic emancipation of woman. Into 
the wider ethical and religious aspects of this great problem 
the present is not the place to enter. 

(2) Next we have freedom of movement. In the middle 
ages the right of internal migration was often restricted. Under 
the settlement laws in England, for instance, it was virtually 
impossible for a workman to leave his native parish. In mod- 
ern times the growth of freedom has brought the right not 
only of internal but of international migration. The restric- 
tions on emigration still existing in Russia, for instance, are 
a relic of mediae valism. On the other hand, the prohibition 
of immigration which is sometimes found in modern countries 
must be judged in the light of liberty in the positive sense, as 
explained in the preceding section. Chinese immigration into 
the United States, for instance, is forbidden. Cheap Chinese 
labor would undoubtedly help in developing the resources of 
the Pacific slope; but the vital objection to it is the permanent 
inequality between the Chinese and the American workman. 
Immigration in general is to be welcomed in a young country 
like America with relative underpopulation, because even 
though the standard of life of the immigrant may be lower 
than that of the native, he or his children will soon reach the 
American level. The Chinaman, however, refuses to assimilate, 
and will not adopt American methods. He retains and per- 
petuates his lower standard, and thus, if present in sufficient 
numbers, would inevitably drag the American standard down to 
his own level. Freedom of immigration, which in this case 
means prosperity for the employer and comparative comfort 
for the immigrant, implies permanent degeneration for the 
American workman and thus ultimate economic decay. It is 
a specious liberty, because based on inequality. 



§ 69] Kinds of Economic Freedom 167 

When, however, there is any prospect of speedy equality and 
the immigration is not artificially fostered by foreign govern- 
ments or interested transportation agencies, interference with 
the freedom of immigration is uneconomic. This was the 
error of the Know-nothings in the fifties, as it is of the anti- 
immigrationists at present in the United States. That the low- 
class immigrant is the chief source of supply of the sweat-shops 
and in many respects complicates the labor problem is un- 
doubtedly true and ominous. The remedy, however, consists 
not in abolishing immigration, or even in restricting it ma- 
terially, but in raising the standard of pay and conditions of 
work through labor organization, public opinion and legal en- 
actment, and in making this possible by increased production 
and successful enterprise. In a period, indeed, where the 
labor market is already overstocked, the force of this argu- 
ment will be much impaired. As a consequence the law of 192 1 
limited immigration into the United States to three per cent of 
each nationality now in the country, x 

(3) We come next to the freedom of occupation. The right 
of choosing one's profession was in former times hedged in 
by all manner of barriers. At its worst the system of caste 
and custom prevented progress because it put men into voca- 
tions for which they were not fitted. Freedom of occupation 
insures as far as possible the right man for the right place, and 
this leads to enhanced production and better distribution. The 
only restriction which modern society permits is the evidence 
of fitness, in those occupations where incompetence would 
imply irresponsibility and involve injury to others as well as 
to oneself. The certificates required from doctors, dentists, 
engineers, plumbers, pilots and the like are not a hindrance, 
but an aid, to true liberty. The apprenticeship regulations of 
the trade unions, however, are sometimes good, sometimes bad. 
Where they are designed to insure good work, of even to pre- 
vent the degradation of wages and the workman's standard of 
life through the irruption of large numbers of underpaid ap- 



t68 Freedom [§69 

prentices, there is much to be said for the practice. But when 
the object is simply to keep out competent workmen and to 
erect a monopoHstic closed corporation, as in the late stages 
of the guild system, the limitation is clearly indefensible. 

(4) Another kind of freedom is the freedom of association; 
The chief forms of association for economic purposes are com- 
binations of labor and combinations of capital. In classic 
Rome, as in modern Russia, where both political and economic 
aims were sought we find a stern repression of labor associa- 
tions. Even after the right of political and religious asso- 
ciation had been won, however, combinations of labor were 
prohibited. Under the modern factory system such^ combina- 
tions have assumed the form of trade unions. It was not until 
1824 in England, and considerably later in America and con- 
tinental Europe, that the prohibition was removed. The legiti- 
macy of union, as such, is now accepted because it is recognized 
that it tends to secure the real freedom of the laborer. The 
individual workman in a large factory is at a clear disadvantage 
in dealing with the employer; the union, as we shall see (§ i8o), 
restores the equality by securing the right of collective bar- 
gaining. In the same way the right of free association of capi- 
tal in the form of corporations and other combinations has 
been acquired chiefly in the. past half -century. Here again, 
however, when the nominal liberty of association results in a 
^' restraint of trade" or virtual monopoly inimical to the general 
interests, the community is justified in curbing its excesses 
whenever the contest involves a crass inequality or is con- 
ducted without any sense of social responsibility. The greatest 
care, however, must be observed in the analysis before the in- 
fringement of the right of association can be conceded. To 
abandon liberty because of a mere apprehended but imaginary 
inequality would be to sacrifice both liberty and equality. A 
clear case must be made out before the law should be invoked 
against the combinations of either labor or capital. 

(5) The fifth category, freedom of consumption, needs only 



§69] Kinds of Economic Freedom 169 

a word in this place. The sumptuary laws of old which pre- 
scribed in detail what should be eaten or worn were sometimes 
well intentioned, but always mistaken. By restricting the ex- 
pansion of wants, they really checked economic progress. 
Modern society has abandoned such a system completely, and 
where it becomes desirable in the interests of the public health 
or safety to prohibit the use of certain commodities, like over- 
ripe fruit, or infected meat, or opium, the end is attained far 
better by a prohibition of sale, under the police power of the 
state, than by a restriction of consumption. 

(6) We come, sixthly, to freedom of production, including 
freedom of contract and enterprise. Here, again, the emphasis 
has been shifted in modern times. The world has outgrown 
the time-worn conception of the citizens as the children of an 
all-wise and benevolent paternal government. It has been 
realized that governments are not always benevolent and never 
all-wise, and that with the growth of capital and competition 
better results can be secured by the repeal of the complicated 
and often contradictory provisions which throttle production 
and check individual initiative. It was this that the French 
manufacturers meant when they told Colbert " laissez-nous 
faire" and thus introduced a celebrated phrase. That was 
indeed the necessary destructive process of pulling down the 
barriers which impeded progress because they checked equal 
opportunity. It has been found requisite, however, in recent 
times to modify both the theory and the practice of laissez- 
faire in order to safeguard the interests of various classes of 
society. The complex requirements of modern life have ne- 
cessitated a governmental regulation of many business enter- 
prises in behalf of producers, of consumers, of investors or of 
the general public. The difference between mediaeval and 
modern interference is to be found chiefly in the fact that the 
one sought to prevent competition while the other endeavors 
to enlarge its domain and to raise its level. The only excep- 
tion to the rule that rational modern interference is not de- 



1 70 Freedom [§ 69 

signed to prevent competition is found in those few cases 
where competition itself becomes wasteful and inefhcient. 
The modern aim, however, is always to increase liberty through 
the attainment of equality and responsibility. Factory laws 
give the operatives a fair chance; railway regulation attempts 
to secure equal treatment of shippers; supervision of banks, 
insurance companies and other corporations is designed to en- 
force financial responsibility. In all these cases interference 
is justified only as leading to a surer and greater general 
liberty. We have to deal with the positive, not the negative, 
conception. 

(7) Finally, we have freedom of trade. This is virtually 
included under the last head, since trade is a species of pro- 
duction. It forms, however, so important a part of the subject 
that it has generally' been treated separately. The modern age 
has seen the emancipation of internal commerce from mediaeval 
restrictions of all kinds. The great controversy to-day centres 
about international trade. Here, again, the general hypothesis 
must be in favor of freedom. Free trade, however, is not 
necessarily and always beneficent. If the relative inequality of 
two countries in the production of a certain commodity is 
great, free trade may hinder in the weaker country the growth 
of an industry which might become relatively profitable or 
even highly necessary. Under such conditions protection, by 
building up the industry to the point where there will be a 
domestic competition, may help in creating that relative equal- 
ity between the domestic and the foreign producer which will 
ultimately redound to the interests of the consumer as well. 
As we shall see later, however (§ 214), such a policy is defensible 
only when protection actually increases real productive effi- 
ciency, and when the undoubted intermediate economic loss 
does not outweigh the ultimate advantage. Only in such a 
case is interference with freedom legitimate, because only then 
is it in the interests of a more real and beneficent ultimate 
freedom. 



§ 7o] / Individual Liberty 171 

70. Individual Liberty as a Social Concept 

We see, then, that in modern life liberty is a result rather 
than a cause. It does not mean simply the absence of restraint; 
for that is license, not liberty. All social progress is the result 
of a certain restriction of the liberty of some in the interest of 
all. These restrictions are imposed by custom, by voluntary 
association, by law. Good manners and social usages which 
prevent men from doing what they like are a mark of civiliza- 
tion. Associations like the church, the clubs and business 
unions lay down rules to which each member must conform. 
Government enacts many laws whose wisdom is unquestioned 
and obedience to which is compulsory. In every case there 
is necessarily an infraction of liberty in the crude sense. More- 
over, especially in industrial matters, the cry of individual 
liberty often becomes a mere shibboleth invoked by the indi- 
viduals against others instead of themselves. The railway 
magnate restricts his own liberty by pooling arrangements, 
but objects to interference by the shipper. The slave owner 
wanted freedom of trade, but scouted freedom of man. The 
manufacturer demands protection against his foreign competi- 
tor, but objects to factory laws. The cotton grower acclaims 
the rise of prices brought about by manipulation on the ex- 
change, while the spinner decries the liberty of speculation. 
The factory owner joins the selling bureau which restricts out- 
put or fixes prices, but objects to the "tyranny" of the labor 
union. The labor union adopts provisions relating to appren- 
ticeship, the open shop and the boycott, but opposes lockouts 
and trusts. The lawyer refuses to consort with the "shyster" 
and the doctor with the quack, because they desire to main- 
tain the standard of their professions; but they sternly repro- 
bate the effort of the trade unionist to prevent the "scab" from 
reducing the level of his occupation. 

Liberty, then, must be looked at from the social as well as 
from the individual point of view. The individual has become 



172 Freedom [§ 70 

what he is largely through associated effort. This, however, 
inevitably implies a certain subjection of the individual to the 
group. The liberty which is compatible with social progress 
involves the readiness of the individual to work for a common 
end. If this readiness is not voluntary, it must be developed 
by persuasion or by force. All liberty is a balancing between 
the powers of anarchy and of tyranny. Individual freedom 
that is oblivious of the rights of others or of the best interests 
of the majority leads to an anarchy that is destructive of real 
liberty; group restrictions that are forgetful of the possibilities 
of the individual lead to a tyranny that is equally destructive 
of real liberty. From the economic point of view only that is 
real freedom which is calculated to reconcile the greatest possi- 
ble production in the group with the greatest possible con- 
sumption of every individual within and without the group. 
The liberty of one, therefore, must not endanger the economic 
progress of others. 

Just as the political interpretation of liberty is democracy 
in government, so the economic liberty which is conducive to 
progress can exist only with a relative economic democracy. 
It implies at least economic opportunity, and opportunity 
depends on a certain degree of equality and responsibility. 
In this sense the best government is not that which governs 
least, but the one which secures the surest conditions of a wider 
ultimate freedom. Economic liberty in the last analysis 
is the result of action, not of inaction. 



Part III 
Structure and Process of Economic Life 



Book I 
Value: General Principles 



CHAPTER XII 
THE MEANING OF VALUE 

71. References 

W. Smart, Introduction to the Theory of Value (191 1), chs. ii-viii; J. B. 
Clark, Philosophy of Wealth (1886), ch. v., and Distribution of Wealth 
(1899), chs. xv-xvii; M. Pantaleoni, Pure Economics (1899), part i, ch. 
iv; A. Marshall, Principles (1910), bk. iii; N. G. Pierson, Principles 
(1902), part I, ch. i, § 3; W. S. Jevons, Theory (1911), ch. iii; F. A. 
Fetter, Economic Principles (191 5), part i; E. v. Bohm-Bawerk, Positive 
Theory of Capital (1891), bk. iii, chs. i-ix; F. v. Wieser, Natural Value 
(1893), bk. i; CM. Walsh, Measurement of General Exchange Value 
(1901), ch. i; H. J. Davenport, Value and Distribution (1908), ch. 
xvii;, P. H. Wicksteed, The Commonsense of Political Economy (19 10), 
chs. i, ii; B. M. Anderson, Jr., Social Value (191 1). 

72. Original Meaning of Value 

Value is the Latin term corresponding to the Saxon "worth." 
The fundamental idea which underlies worth is capacity to 
satisfy a want. If we need a nail, but find a broken one, we 
say that it is worth nothing, — that it is valueless, or not avail- 
able, for our purpose. Value or worth thus implies usefulness 
or utility. The nail is valueless for us; if it "avails" nothing, 



1 74 Meaning of Value [§ 72 

it is of no use. Since value implies capacity to satisfy wants, 
there are as many kinds of value as there are classes of wants. 
Things have a scientific value, an aesthetic value, a religious 
value, a philosophic value, a political value and so on. The 
value with which economics has to deal is economic value — 
a small subdivision of the whole. As this is a treatise on 
economics, we shall hereafter use the term value in the sense 
of economic value, that is, the value of anything for economic 
purposes. But just as we know (§ 2) that the economic life 
is not the whole life, so we must not confound economic value 
with value in general. When we defined economics at the 
close of section 4 as the science of value, it must be remem- 
bered that what is meant is the science not of all. value, but 
only of economic value. 

Incidentally we may point out the original dependence of 
moral considerations on economic facts. A thing was at first 
"good" in the economic sense, as we still employ the phrase 
a stock of goods and commodities. The ethical use of good 
came much later. In popular parlance we still speak of the 
broken nail as "no good," without desiring to pass any moral 
judgment on it. In the same way the original concept of " dear " 
was not ethical, but economic. A commodity may still be 
dear even if we do not love it. So also what is ethically pre- 
cious to us was originally of economic importance; we still speak 
of precious stones in this economic sense. To-day we esteem 
somebody, when originally we put a money value on him 
(aestimare, from aes, money). In modern times we appre- 
ciate a quality, but at first we set a price on it (ad-pretium) . 
In fact, so fierce was the struggle for existence among the early 
Romans, so important for their very stability was the quality 
of bravery, that the thing of chief value to them, the charac- 
teristic which "availed" the most, was "valor," a term which 
has now become with us of exclusively ethical import. 

This close connection of ethics and economics must, how- 
ever, as we have seen, not blind us to the fact that the real 



i 



§73] Marginal Utility 175 

subject of our discipline is economic. The utility with which 
we have to deal is the economic utility, the capacity of a thing 
which we must economize in order to satisfy a want. The 
use of whisky may be ethically reprehensible, but as long as men 
desire it, and as long as they must be economical with it, that 
is, as long as it is not a free good, but an economic good, whisky 
will have an economic usefulness, — it will be used to satisfy 
the craving for drink; and it will have a value in the market. 
The ethical judgment of the community may indeed affect 
the economic situation. The practice of drinking to excess 
may be visited with such severe social reprobation that the 
appetite for drink may be held in check, and the utility of whisky 
will then diminish because the desire for it will have decreased. 
The study of human wants is largely a matter of social psy- 
chology, and the character of human wants is continually being 
modified by moral considerations; but when we are dealing with 
the serviceableness of a commodity for satisfying want, we are 
operating with economic quantities. The economist must 
continually bear in mind the moral aspects of the situation as 
modifying the conditions; but, the conditions once given, the 
economic problem is a thing by itself. 

As a preliminary definition, then, we may say that the value 
of anything is the expression of our estimate of its utility, 
meaning by utility its capacity to satisfy human wants. 

73. Marginal Utility — The Law of Diminishing Utility 

It is obvious that this definition is incomplete. Iron is more 
useful than diamonds, yet diamonds are incontrovertibly more 
valuable. In what sense is value an expression of utility? 

If a starving wayfarer suddenly spies an apple, it will have a 
supreme utility for him because it stands between him and 
death. If he finds a second apple, it will still be welcome, but 
will fill a somewhat less intense want. With every additional 
apple his appetite will be more appeased, until with let us say 
the tenth apple he will reach the point where he will be on the 



1 76 Meaning of Value [§ 73 

margin of doubt whether to consume any more. The utility 
of each apple — its capacity to satisfy his desire — has di- 
minished until the tenth apple is the last which affords any 
utility at the moment. The utility of this tenth apple is called 
final because it is the final apple, or marginal because on the 
margin of desire. 

It is plain that the marginal utility of any apple depends 
on the quantity at one's disposal. The greater the quantity, 
the less keenly will he feel the particular want. If he had only 
five apples, the utility of the fifth, that is, the marginal utility, 
would be considerable because his last want satisfied would 
still be urgent. The degree of marginal utility depends on the 
strength of the want last satisfied, or, it might be said, on the 
need we have of more. 

The second point is that at any given time the utility of 
each apple is equal to that of the last and therefore to that of 
any other (of the same size and quality). If the available 
supply is five apples, any one of the five may be considered 
the marginal unit, that is, the last unit in point of time. The 
wayfarer will lay his hands on any one of the five without par- 
ticular choice; whether he begins with one or with another is 
immaterial, because he knows that one is as good as another. 

Thirdly, in estimating the utility of the entire supply of 
apples, we must distinguish between the total utility and the 
effective utility of the stock, that is, the utility which is of any 
effect when we compare given quantities of different goods. 
The total utility of a stock is obtained by adding the utility of 
each apple to that of its predecessor. It will accordingly grow 
until the point of satiety has been reached. Ten apples possess 
more total utility than five. The effective utility of the stock, 
however, is equal to the marginal utility of the final unit mul- 
tiplied by the number of units. The effective utility of four 
apples is four times the marginal utility of the fourth. The 
effective utility of the stock grows, but not up to the point of 
satiety; after a limit has been reached, it begins to decline. 



§ 73] Marginal Utility 177 

The effective utility of eight apples may be less than that of 
five, even though the total utility is undoubtedly more. 

This can be made clear when we remember that we have 
many wants and that the degree in which things satisfy our 
wants depends on their relative importance. In addition to 
apples, the wayfarer needs other kinds of food, clothing and 
shelter. If he has only five apples, his desire for them may be 
so strong that he thinks of nothing else; but if he has eight 
apples, his desire for the apples may be overtaken by his desire 
for let us say three articles of clothing. If there were a hun- 
dred apples at his disposal, knowing that he had sufficient for 
many future meals, he would turn his attention almost entirely 
to still other needs. Air, for instance, is indispensable to life, 
but it is so abundant that it has no marginal utility at all and 
hence no effective utility, although its total utility is limitless. 
If the supply of air was shut off, however, he would abandon one 
by one his other needs, until finally his only desire would be 
for air. In other words, as long as he thinks chiefly of apples, 
which he will do as long as he can get only five, he wants all 
five; but as soon as he thinks of other things (which he will do 
when there are say eight apples) the less will be the impor- 
tance which he will attach to the eight. The smaller the 
number of units, the more rapid will be the rise in their margi- 
nal utility. If in the case of five apples the marginal utility of 
each is five units of satisfaction, the effective utility of the stock 
will be five times five, or twenty-five; but if in the case of eight 
apples the marginal utility falls to three, the effective utility of 
the stock will be eight times three, or twenty-four. Yet the 
total utility of eight apples is certainly more than that of five. 

It is important to note, moreover, that the word margin 
is used in two senses, or, rather, that there are two different 
kinds of margins. When we speak of the marginal use of a 
commodity to any one, we think of him as on the brink of not 
wanting any more. He may reach the margin because, with 
the diminishing utility of each increment, he will, if the supply 
12 



178 Meaning of Value [§ 73 

is large enough, come to the point where there will be no 
consciousness of any economic usefulness at all. The margin 
becomes a margin between the economic world and the non- 
economic world, a margin between the sphere of economizing 
and that of unconcern or waste. On the other hand, when the 
supply is limited, the diminishing utility of each increment will 
be arrested at a point below which the consumer will prefer to 
abandon the use of an increment for something else. The 
margin here is a margin of indifference between an increment 
of one commodity and an increment of another commodity. 
Since these increments are not necessarily the same, the mar- 
gin of -indifference may be reached at a point where the tenth 
increment of one commodity balances the twentieth of another, 
where, in other words, the marginal utility of the one commod- 
ity is twice that of the other. Both marginal increments will 
still possess a positive utility. This second kind of margin is 
an economic margin, that is, a margin or border between two 
or more economic goods, not as in the first case a margin be- 
tween economic and non-economic goods. The first kind of 
margin, where we compare different increments of the same 
thing, may be called the non-economic margin, because at the 
margin the utility is zero and the commodity is no longer an 
economic good. The second kind of margin, where we com- 
pare the same or different increments of different things, may 
be called the economic margin, because at the margin the 
utility of each thing is still measurable and appreciable. We 
shall have repeated occasion to call attention to the errors 
that result from confusing these two kinds of margins. 

To recapitulate: the utility of a commodity is called mar- 
ginal because the desire for additional quantities must some- 
time reach a limit or margin as compared with the desire for 
other commodities. There is always one unit in the supply 
which marks the margin of this desire; and with every change 
in the supply or the desire, the margin will move up or down. 
This unit is called the marginal unit or increment. With a 



§ 74] Individual and Social 179 

fixed quantity the utility of each unit or increment is for prac- 
tical purposes equal to that of the marginal unit, because if any 
unit were withdrawn the final unit would naturally be put in 
its place. The real loss would be the loss of the marginal unit. 
Value, then, is not simply the expression of utility in general, 
but of marginal utility. When we speak of the value of a com- 
modity, we think not of its usefulness in general, but of the 
utility of a definite quantity as compared with other goods; 
and in so doing, we think not of the total utility of this quan- 
tity in itself, but of its effective utility, thatjs_jQllhe„utility oL 
the rnargi»al unit multiplied i)y_.the number of units. 

74. Individual and Social Value 

Value as a universal conception would be true of the indi- 
vidual living apart from society, if there were any such beings. 
The estimate put by the individual on one commodity as com- 
pared with another is the foundation of all value. Robinson 
Crusoe would assign a value to apples as compared to nuts, the 
value of each being in agreement with their marginal utility to 
him. As a matter of fact, however, we live in society, not on 
a desert island. Economics, as a social science, treats of the 
relation of man to man, of class to class. The value with 
which we deal is therefore the result of social forces. It is 
society as a whole which sets a value on things. Society is 
indeed composed of individuals, but it is the aggregate of in- 
dividual wants that shapes value. The want of the individual 
affects value only as it influences this aggregate. If a rich 
maniac, for instance, should offer a thousand dollars for a com- 
mon spoon for which every other person would give only five 
cents, his subjective estimate would have no appreciable in- 
fluence on the value of the spoon, and if he actually paid a 
thousand dollars, society would be justified in locking him up 
and in punishing the seller. Of course, when the supply of an 
article is limited and the desire of the individual such that the 
article possesses a peculiar utility for him, not shared by the 



i8o Meaning of Value [§74 

rest of the community, his subjective estimate may seriously 
influence its value. This is true, however, only for the reason 
that because of the limitation of supply the subjective estimate 
of the single individual forms so large a part of the collective 
desire. To get my ancestor's watch out of pawn, I may pay 
if necessary far more than its value to any one else. The 
border between an enthusiastic collector and one with a ''screw 
loose" is sometimes a narrow one. Ordinarily, however, the 
desire of any one individual forms only an insignificant part 
of the collective desire. 

Value, therefore, depends upon the fact not only that each 
individual measures the relative urgency of his own various 
wants, but that he compares them consciously or unconsciously 
with those of his neighbors. I not only measure the relative 
satisfaction that I can get from apples or nuts, but the quan- 
tity of apples I can get for the nuts depends on the relative 
estimate put upon both by the rest of society. If an apple is 
worth twice as much as a nut, it is only because the group that 
uses both apples and nuts finds, after comparing individual 
preferences, that the desire unsatisfied by the lack of an apple 
is twice as keen as that unsatisfied by the lack of a nut. Value, 
therefore, is not merely the expression of marginal utility; it 
is the expression of social marginal utility. 

This serves to explain how a thing which has no direct utility 
to the individual may yet possess a value for him. If by chance 
I secure a locomotive, it is in itself useless to me. If, how- 
ever, I can dispose of it to a railroad company, it acquires 
a value, because in other hands it will serve a social purpose. 
The locomotive now has an indirect utility for me because 
through it I can secure things of direct utility. Its indirect in- 
dividual marginal utility to me is the result of its direct marginal 
utility to the community, that is, to that part of the community 
where marginal comparisons are made between locomotives and 
other goods. Of all the valuable things in existence only an 
infinitesimal fraction possesses any direct utility for any one 



§ 74] Individual and Social 1 8 1 

man; yet the more of them any one has, the richer he is, pro- 
vided he can dispose of them to others. Thus, while social 
utility is made up of a combination of individual utilities — that 
is, while a thing cannot be useful to society unless it is useful 
to the individuals that compose society — the indirect margi- 
nal utility of a thing to any individual is the result of its social 
marginal utility. To a member of society the indirect mar- 
ginal utilities form the chief element in value. Hence in 
society the individual marginal utility which controls value 
may be said to be the reflection of social marginal utility. Our 
readiness to part with nuts or apples will depend not so much 
on the degree in which we as isolated individuals prize nuts as 
compared with apples, but chiefly on the degree in which other 
people prize apples as compared to nuts. This estimate is the 
controlling consideration. Value is a result of the community 
of wants. 

The problem with which we set out in the last section is 
thus solved. There are, in fact, two solutions, — one depending 
on the distinction between total utility and marginal utility, 
the other depending on the distinction between individual 
utility and social utility. As to the first, iron in the abstract is 
indeed more useful than diamond; but a pound of iron does 
not satisfy as many or as urgent wants as a pound of diamonds, 
and it is therefore not so valuable, even to an isolated indi- 
vidual. When we say that iron is more useful than diamonds, 
we refer to iron in the abstract. When we say that iron is less 
valuable than diamonds, we refer to a definite quantity. It is 
therefore true that a commodity may possess more utility and 
at the same time less value than another; but the utility to 
which we then refer is not the marginal utility. The total 
utility of eight apples is greater than the total utility of five, 
but the effective utility may be less. When the Dutch mo- 
nopolists destroyed a portion of the pepper crop to increase 
the price, the total utility of the supply fell, but the marginal 
utility, and hence the effective utility, and the value rose. 



I 82 Meaning of Value [§75 

At the same time it may conceivably happen that to any 
one individual a pound of iron may in and of itself be more 
useful than a pound of diamonds. Yet this fact will not con- 
trol value. For the indirect utility of iron is far greater than 
its direct utility, in precisely the same way that the wants of 
a community are more important than the wants of any indi- 
vidual. Even though a pound of iron may at a given moment 
be more directly useful to an individual, it is always true that 
a pound of iron does not satisfy as many or as urgent social 
wants as a pound of diamonds. When we speak of the value 
of iron or of diamonds, we refer to their social utility, not to 
their individual utility. Or, to put it in another way, the mar- 
ginal utility of iron or diamonds to a man living in society is a 
reflex of their social utility. Therefore iron is always less valu- 
able than diamonds, because the social marginal utility of a 
pound of iron is always less than the social marginal utility of a 
pound of diamonds. Yalue in society is the expression of social^ 
marginal utility. Social economics deals only with this kind of 

value. 

75. Value in Exchange 

Since value is a social conception depending on a compari- 
son of divers goods, and since this comparison is ordinarily 
made in society by their transfer from man to man, it is clear 
that the value with which economics has to deal is exchange 
value, or value in exchange. Speaking roughly, we may say 
that the value of anything is what it will exchange for. Speak- 
ing strictly, we mean that the value of an article may be ex- 
pressed in terms of any other article for which it will exchange. 

Earlier writers made a distinction between value in use and 
value in exchange, but they confused value in use with total 
or absolute utility. As soon as we grasp the fact that the 
utility with which economics deals is marginal utility, the old 
distinction between value in use and value in exchange dis- 
appears. Other writers sometimes use the terms subjective 
and objective value when referring to individual and social 



§ 75] Value in Exchange 183 

valuation respectively. The terms are awkward, because they 
obscure the fact that at bottom value is not an external 
characteristic of a thing, but an expression of its relation to 
an individual. Value is the result of an estimate of a quality, 
not the quality itself. In this sense there is no objective 
value. It can be called objective only in the sense that when 
society attaches a value to a commodity it is something to 
which the individual or subjective valuation must conform in 
making an exchange. 

The study of Robinson Crusoe is important as reminding 
us that the foundation of value is independent of exchange. 
Strictly speaking, it is independent of exchange only as be- 
tween man and man, not as between commodity and com- 
modity or between want and want. Crusoe exchanges or 
weighs off in his mind apples and nuts, and thus gets an esti- 
mate for their value to him. "Value in use" is thus really 
only one kind of "value in exchange," although it is a pe- 
culiar kind of exchange. As soon, however, as we deal not 
with Crusoe, but with men in society, we find that not only 
does the individual as before measure one want against an- 
other, but that the satisfaction of that want depends upon the 
estimate put by other individuals on their respective wants. 
Value in individual economy always presupposes at least two 
things; value in society presupposes in addition at least two 
men. In other words, value in society — that is, in actual 
life — is value in exchange; and this value in exchange is 
nothing but the expression of its true value in use to the mem- 
bers of the social group, that is, of its marginal utility. 

Strictly speaking, the value of a thing exists only at the 
moment when it is exchanged for or compared to something 
else, just as the utility of a thing exists only at the moment 
when it satisfies, or is conceived of as satisfying, a want. Since, 
however, men learn by experience to attribute utility to things 
which can gratify a want, so they attribute value to things 
which they know can be exchanged for other things. Thus 



184 Meaning of Value [§76 

value comes to mean exchange power, or the estimate of ex- 
change power. 

It is accordingly plain that when we define the value of a 
thing as the expression of its social marginal utility, we mean 
that value is an expression of its exchange power; for ex- 
change power is based on the comparative estimate of direct 
social utility, which gives to every owner of the commodity the 
indirect individual utility that fixes value in society. As we 
can estimate this exchange power only by comparing one thing 
with another, value is sometimes, but less accurately, spoken 
of as a ratio, or a ratio of exchange. Value is indeed relative, 
but it is not a relation or a ratio; it is an expression of our 
estimate of the relative exchange power of anything. 

76. Value and Price 

Since value is an expression of our estimate of relative ex- 
change or purchasing power, the value of anything can be 
ascertained only by comparing it with other things. When we 
measure a commodity in terms of some one other commodity, 
we speak of price. If the value of a cow is equal to that of 
five sheep, we say that the price of a cow is five sheep. In 
civilized society we have become accustomed to measure all 
values in terms of a single commodity called money; so that 
by price we now mean the money value of anything, — the 
amount of money for which it will exchange. 

Value and price have thus come to be interchangeable terms. 
Sometimes, however, value is used in a special sense. Thus 
we speak of a thing as selling for less than its real value, or of 
a shopkeeper charging more than it is worth, when we mean 
that the price to others in the long run will be higher or lower. 
So the department stores advertise "great values" when they 
mean that the goods are sold at exceptionally low prices com- 
pared to the seller's estimate of their utility to the public. 
Ordinarily, however, when we say a thing is worth five cents, 
we mean "that the price is five cents. 



§ 77]-^ Increments of Wealth 185 

While the value of anything is thus virtually equivalent to 
its price, we must not confuse values in general with prices in 
general. When we conceive of a single commodity, like money, 
as a standard, we consider it as a fixed point, not subject to 
fluctuation.^ Prices hence may rise or fall with reference to 
this standard. But we cannot speak of a general rise or fall 
in values, because there is no fixed point. Cows may rise in 
value as compared with sheep, but sheep themselves may fall 
as compared with poultry, and poultry may vary as compared 
with something else. Value expresses a relation; hence, if the 
value of some articles diminishes, it means that the value of 
others must increase. But if the price of certain articles falls, 
it does not follow that the price of other articles will rise. There 
may be a general rise or fall of prices, because we measure 
prices in one commodity, money; there cannot be a general 
rise or fall of values, because money also has a value.^ 

77. Value and Marginal Increments of Wealth 

We have thus far spoken of value as the expression of social 
marginal utility. To be more exact, it should be stated that 
marginal utility (and hence value) depends not upon the com- 
modity as a whole, but upon the marginal increments of wealth 
in the commodity. This might be called Clark's law, from 
its first formulator, Professor John B. Clark. 

To prepare the way for grasping this principle, we must call 
attention to several points. In the first place, the rapidity 
with which the utility of successive increments of a commodity 
diminishes depends largely on its combination with others. 
One scarf-pin is all a man needs, the utility of a second would 
be doubtful, a tenth would be useless. But with many cravats, 
we can use more scarf-pins. Put before the same man a finely 

^ As to the difficulties that arise from fluctuations in the money stan- 
dard, see below, § 197. 

2 When Wall Street speaks of a " general slump of values," it means 
only a fall in the prices of securities traded in on the stock exchange. 



1 86 Meaning of Value [§77 

cooked dinner or a loaf of bread, and not only will he enjoy 
the first more, but he will be willing to pay a higher price for 
the bread as a part of the dinner. 

Secondly, in all commodities except the simplest of a class 
there is always to be found a combination of various utilities. 
A plain deal table suffices to hold books; one of polished rose- 
wood satisfies a more refined want and possesses an additional 
utility. I may have an ample supply of boots, yet a new pair 
with golf rubbers in the sole may be desired for that reason 
alone. Each new utility in an object practically makes it a 
new object. All commodities are virtually made up of such 
combinations or bundles of utilities. 

Thirdly, the marginal increment of a man's wealth is made 
up of varying proportions of such separate utilities. Every 
one purchases first necessaries, then comforts, then luxuries. 
But what is luxury to one man may be almost necessity to 
another. What is bought with one's last dollar is the marginal 
increment of enjoyment; but the more dollars we have, the 
less the utility of each. To a man with a very small income 
the final dollar may afford the luxury of a few pints of beer; 
to the rich man the dollar spent in beer is not marginal. His 
marginal increment of wealth may take the form of luxuries 
like champagne or pictures, but they will generally consist of 
particular attributes of commodities. It may be the fashion- 
able cut of his garments, the last touch given to the delicious 
dinner by a cordon bleu, the sumptuousness of his books, the 
elegance of his carriage, the artistic quality of his china or silver- 
ware. The garments, the dinner, the books, the carriage, the 
china, — each possesses various kinds of utility; but what 
makes the particular objects desirable to him is not the pri- 
mary, elementary utility in each, but the final marginal utility. 

Fourthly, since each of the separate utilities of an article 
becomes at a certain point marginal to different classes of men, 
its value depends not upon its marginal utiHty as a whole, 
but upon that of the increments of utility each estimated 



§77] Increments of Wealth 187 

separately. If value were the measure of marginal utility as a 
whole, all but the simplest commodities would be worth far 
more than they are. Take, for instance, a fine automobile. 
There are at least five different qualities which give it a value. 
These are, in the order of importance, (i) power to afford 
locomotion; an old two- wheeled cart would do as well: (2) 
freedom from jolting and protection from sun and rain; a top- 
buggy would do this: (3) size; a plain coach would possess 
this: (4) elegance of finish; a fine equipage would have this: 
(5) speed and exhilaration; only a motor car will give that. 
In such a vehicle there would be, so to speak, at the same time 
a cart, a buggy, a coach, an equipage, a self -propeller. The most 
important or primary utility is the power to afford locomotion. 
Without this it would be of no use at all. The next quality in 
importance is comfort; if it has no springs, the vehicle will not 
be used for pleasure driving. And so on with the other quali- 
ties; each has a diminishing importance. Yet the value of 
the vehicle is not the reflex of its marginal utility as a whole. 
For the primary quality of locomotion alone the rich man 
would, if necessary, pay an immense sum. The mere fact of 
riding, which might be a luxury to a poor man, may be a neces- 
sity to him. The second utility — comfort — would be less 
important than the first, but might still be prized immeasur- 
ably by him. And so on with the other qualities. So that, if 
need be, he would pay a fabulous amount for the vehicle. 

As a matter of fact, however, what he values in the partic- 
ular automobile is the fifth or final utility, that of self-pro- 
pulsion. He probably has buggies, coaches and equipages 
galore. The fourth, third and preceding utilities represent 
less value because each utility is marginal in turn to a class 
of smaller spending power. If automobiles rose in price, there 
would be fewer of them, but more equipages, because the 
particular quality which differentiates an equipage from an 
ordinary coach would be a marginal utility within the reach of 
a larger but less wealthy class. If equipages advanced in 



1 88 Meaning of Value [§ 77 

price, more plain coaches would be built; if the price of coaches 
rose, more buggies would be built. In each case the vehicle 
is desired by a particular class for a new utility, which is to that 
class marginal. Each successive class, however, is poorer than 
its predecessor, and the gradations themselves become less. 
There is more divergence between a multi-millionaire and a 
man of moderate wealth than between the latter and a man of 
simply comfortable means. Thus there will be a greater dif- 
ference in price between automobiles and equipages than be- 
tween these and coaches, more between a coach and a buggy 
than between a buggy and a cart. In each case the special 
utility for which the vehicle is bought is a marginal utility to 
a poorer class. When a rich man buys an automobile, he does 
not pay the immense sum which he would, if necessary, give 
for the mere privilege of locomotion. He pays the small price 
which a poor man would pay for a cart, plus the somewhat 
larger addition that a slightly less poor man would pay for the 
difference between a cart and a buggy (comfort), plus the still 
greater increment that a man of moderate means would pay 
for the difference between a buggy and a coach (size), plus the 
yet larger increment that a fairly wealthy man would pay for 
the difference between a coach and an equipage (elegance), plus 
the final and largest increment that he and his class are willing 
to give for the marginal utility to them of the automatic attach- 
ment. All these increments added together are far less than 
what he would, if necessary, pay for the privilege of locomo- 
tion, — the cart element in the automobile. 

When, therefore, we say that value or purchasing power is 
the expression of social marginal utility, it is clear that what 
we mean is that value is the expression of the social marginal 
increments of utility which are bundled together or united in 
anything, and each of which is marginal to a different class. 



CHAPTER XIII 
THE MEASURE OF VALUE 

78. References 

W. Smart, Introduction to the Theory of Value (1891), chs. ix-xiv; J. B. 
Clark, Philosophy of Wealth (1886), ch. xxiv; A. Marshall, Principles 
(igio), bk. V, ch. xiv; N. G. Pierson, Principles (1902), part i, ch. i, 
§ 4; W. S. Jevons, Theory (1911), ch. iv; E. v. Bohm-Bawerk, Positive 
Theory of Capital (1891), bk. iii, ch. x; F. v. Wieser, Natural Value 
(1903), bk. v; A. W. Flux, Economic Principles (1904), ch. iv; C. M. 
Walsh, Measurement of Exchange Value (1901), ch. i; J. A. Hobson, 
Economics of Distribution (1900), ch. ii; H. J. Davenport, The Economics 
of Enterprise (19 13), ch. vi-viii; D. I. Green, Pain Cost and Opportunity 
Cost (Quart. Jour. Econ., VIII, 1895); A. C. Whitaker, History and Crit- 
icism of the Labor Theory of Value in English Political Economy (Co- 
lumbia Studies, XIX, 1904); J. B. Clark, Essentials of Economic Theory 
(1907), chs. iii and vi. 

79. Meaning of Cost 

Value, as we have seen, has a meaning only when attached 
to a definite quantity of an article. The value of iron means 
nothing; the value of a ton of iron means something. In 
order to ascertain why anything has value, we must therefore 
inquire not only why we attach any importance to it as com- 
pared with other things in general, but also why a definite 
quantity of that article satisfies more or less of our wants than 
an equal quantity of something else. We must regard not 
only our desire in the abstract, but our desire for a particu- 
lar amount. That is, in analyzing value we must take into 
consideration not only the demand, but the supply; for the 
effective demand for an article which lies at the root of 
value is itself influenced by the supply. Of two equally useful 
articles we shall be more concerned in securing the one the 

189 



1 90 Measure of Value [§ 79 

supply of which is limited than the one the supply of which is 
abundant. 

What regulates supply? In the last resort it is the forces of 
nature as utilized by the energy of man. In some cases nature 
gives so abundantly that man need do nothing; in other 
cases nature is so niggardly that his utmost effort fails to 
augment the scanty stock. Between these two extremes lie 
the great mass of commodities the supply of which can be 
increased through human action. The more readily nature 
discloses her secrets to man, the less is the difficulty of secur- 
ing a supply. The greater the stubbornness of nature, the more 
determined do our efforts become. It is in this sense that 
value may be considered to be the measure of the difficulty of 
attainment, — that is, of the cost involved in securing a supply. 
Value, then, would be the expression of costliness. 

What, more precisely, is cost? The word is used in a 
variety of senses. To the consumer cost means price; if a thing 
costs a dollar, he means that the price is a dollar. To the 
employer cost means total cash outlay expended in production. 
Here the cost usually is less than the price, the difference 
between cost and price being the profit: a machine may cost 
the builder ten dollars; he may sell it for twelve. To the 
workman cost means irksomeness of labor; the harder the 
work, the more does his labor ''cost" him. Underlying all 
these meanings is the idea of sacrifice, the giving up of some- 
thing in return for the object to be attained. All sacrifice 
involves a pain, — a pain of doing something distasteful or 
of refraining from doing something pleasurable. The one is 
present physical sacrifice, the other present mental sacrifice 
depending upon a future physical sacrifice. 

Just as the word utiHty brings to our mind the pleasure 
we get from a thing, so the term disutihty is used to signify 
its ability to inflict pain. We know that the marginal utility 
of a commodity diminishes with the increase of the amount 
at our disposal, and under certain conditions shrinks to zero. 



§ 79] Meaning of Cost 191 

We have so much of it that it becomes indifferent to us. It 
possesses what Jevons calls "inutility," that is, no (marginal) 
utility. Its value, as in the ordinary case of air and water, is 
nothing. Under other conditions of supply a commodity which 
usually possesses utility may actually inflict a pain.^ Wood ordi- 
narily satisfies a want; but when the prospective farmer tries to 
make a clearing, the wood is something to be got rid of. Its 
presence is a discomfort. It possesses not a positive, but a 
negative, utility. It has gone through the stages of utility and 
inutility, and has reached that of disutility. Instead of being 
a commodity it might now be called a ''discommodity." So, 
in the same way, water in parts of England is something to 
be removed by draining the fens; water in arid America is 
so necessary for irrigation purposes that it attains a high 
value. 

Not only things external to a man run through this scale 
from utility to disutility. Physical activity itself is subject to 
the same law. When a man begins to work, the exercise of 
his muscles is a pleasure. A certain amount of it is even a 
necessity. With the increase in the amount beyond a certain 
point, the pleasure diminishes, until further activity becomes a 
matter of indifference. A still further increase means dis- 
comfort, until, finally, any more work involves positive agony. 
Labor or toil, therefore, means painful exertion. But just as 
the same commodity may, according to circumstances, possess 
utility or disutility, so the same activity may or may not in- 
volve toil. Singing is generally a pleasure; to the chorus girl 
it is toil. Golf playing is a diversion; to the golf teacher it is 
labor. 

Cost, therefore, is at bottom equivalent to pain. We un- 
dergo pain in order to secure utility or to remove disutility. 
Cost is always the antithesis of remuneration. We give up 
something in order to get something in return. The ordinary 

^ Some commodities which seem to give us pain really afford a surplus 
of pleasure. A distasteful medicine is none the less prized by us. 



192 Measure of Value [§80 

man tries to secure the greatest result with the least effort. 
He will toil only up to that point where the cost, or pain, 
begins to exceed the pleasure of what he gets in return. 
There are grades in disutility or pain, just as there are grades 
in utility or pleasure. As the marginal utility of a commodity 
depends on the supply, so the marginal disutility or pain of 
labor depends on the amount. The more fish I have, the less 
the utility of each; the more hours I must work to catch them, 
the greater the disutility of each hour's work. Up to a certain 
point the pain of the work does not equal or exceed the 
pleasure I get from the fish. Beyond that point I shall not 
work, because the result will be a surplus of pain. At that 
marginal point the utility of the fish equals the pain or cost of 
the labor. There will be a balance between the pleasure and 
the pain; or, in other words, the pleasure and the pain will be 
in equilibrium. In the case of the individual economy — that 
is, of man living apart from society — the marginal degrees of 
utility and of pain, or cost, therefore tend to be equal. 
Marginal cost equals marginal utility. The value of the fish 
may be estimated in either the one or the other. 

80. Individual and Social Cost 

In dealing with the problems of actual life, however, we 
treat not of a Crusoe living on fish, but of men living in soci- 
ety and making exchanges with each other. The individual 
economy is profoundly modified by the social economy. This 
is the point that has often been overlooked. Our study is 
social economics. 

We have seen that the marginal utility to an individual is, 
in effect, a reflex of the social marginal utility. In the same 
way the marginal "disutility" to an individual may be con- 
verted through social causes into a utility. What gives one 
man pleasure may give another pain. I may enjoy a horse; but 
if you do not ride or drive, the horse will put you to the use- 
less expense of keeping him. Yet, since there is a social 



§ 8o] Individual and Social Cost 193 

demand for horses, you can get rid of him to advantage; and 
you will therefore not give him away, but keep him until you 
can sell him with profit. Although the horse had a positive 
disutility for you, he now acquires an indirect utility because 
of social reasons. So if the farmer, mentioned above, who 
wanted to make a clearing, lived by chance near a large com- 
munity, he would not burn the wood, but sell it, because it 
would now have a social utility. Its disutility to him would be 
converted into a utility. It is only when anything produces 
a surplus of pain to the community as a whole — as a plague 
of grasshoppers, or an inundation, or the sewage of a city 
of which there is no intelligent disposition — that it possesses 
social disutility. In such a case it can have no indirect utility 
for the individual. 

Not only may cost thus change into utility, but the real cost 
of importance in affecting value is social cost, not individual 
cost. We stated above that value is the measure of sacrifice. 
In what sense, however, is value the measure of sacrifice? 
Evidently, not of individual sacrifice. A street-sweeper may 
work harder than a skilled factory hand, and yet the value of 
his services will be less. Value is a social conception; society 
puts its appraisal upon commodities. If value is a measure of 
sacrifice and if value is a social estimate, value must be the 
measure of social sacrifice or cost. Social sacrifice means the 
sacrifice which members of society as a whole are willing to 
make. The exertion of one man is estimated in relation to 
the exertion of another, and the sacrifice of each is compared 
with the need of society as a whole. The standard is social, 
not individual. It is far easier to be a street-sweeper than a 
skilled factory hand. Society is more willing to spare the 
former than the latter; for, to replace the one, society must 
give up more of its energy than to replace the other. Con- 
sequently, although the street-sweeper may work the harder, 
the sacrifice or cost to society is less than in the case of the 
factory hand. The latter saves society more effort. When 
13 . 



1 94 Measure of Value [§ 8i 

one commodity is exchanged for another, or when both cost 
the same, it means that the additional sacrifice that would be 
imposed upon society to replace either of them is the same. 
The marginal social cost is identical. 

81. Cost and Surplus 

Since economic activity consists in securing as much enjoy- 
ment as possible with the least effort or cost, it follows that 
under conditions of progress the individual will endeavor to 
secure a surplus utility. If game is plentiful in one section 
and so scarce in another that the hunter must work to the 
point of exhaustion, his needs will be satisfied by far less ex- 
ertion in the first case than in the second. The extra utility 
which he enjoys is called residual utility, or surplus utility, or, in 
short, surplus. Looked at from the point of view of produc- 
tion, it is a producer's surplus: the labor of hunting is the 
cost of securing or producing the game. From the point of 
view of consumption, it is a consumer's surplus: the pleasure 
of eating the game is its utility. The excess of the utility 
over the cost is the surplus. Whether we call it consumer's 
surplus or producer's surplus is immaterial. 

The conception of surplus, however, is sometimes used in a 
second way. In the case of the surplus just referred to we 
compare enjoyment with exertions, and we call it either pro- 
ducer's or consumer's surplus according as we look at it from 
the point of view of cost or of enjoyment. This conception 
of surplus is universal: it applies to every man who is at once 
a producer and a consumer, to the man living in society as 
well as to the solitary huntsman. The term "surplus" may, 
however, be used in another sense, which leaves out of account 
the idea of exertion, and which regards every man only as a 
consumer. It assumes that there has been no cost of acquir- 
ing the articles, or that the subjective cost or toil of ac- 
quisition is precisely the same to all. Here the surplus 
satisfaction that an individual secures is entirely a consumer's 



§ 8i] Cost and Surplus 195 

surplus/ depending on the relative urgency of his different 
wants. If I agree to give up a book for my neighbor's knife, 
I do so because I expect his knife to afford me more satisfac- 
tion than my book. The utility to me of the knife is greater 
than the pain of parting with the book. As a consumer, I 
consider the pain of parting with the book as the exact equiva- 
lent of the utility I lose; but since the utility to be afforded 
to me by the knife is greater than the utility I lose through the 
book, there will be a balance to my credit. As a consumer, I 
expect a surplus enjoyment. 

This specific consumer's surplus, however, is of no prac- 
tical significance. For in actual life we cannot enjoy anything 
without procuring it, — that is, without its costing us something. 
But just as enjoyments or utilities differ from individual to 
individual, so do costs or sacrifices differ. Both the knives 
and the books can be obtained only on the condition of some 
exertion. The cost, or pain, of parting with the book depends 
on the cost, or pain, of acquiring the knife. Hence the only 
real surplus which is of importance is the surplus of enjoyment 
over cost, whether we call it producer's surplus or consumer's 
surplus. If we take the possession of knives or books for 
granted, we can indeed speak of consumer's surplus; but if 
we reflect that knives and books must be procured before they 
can be parted with, the surplus becomes a real surplus, which 
can equally well be called a producer's surplus. It is a sur- 
plus of utility over cost. 

Individual surplus, however, is essentially subjective, and 
never affects prices. For value is a social conception. This 
statement is true of surplus in general, as well as of the abstract 
consumer's surplus just referred to. I secured a surplus utility 
from my comrade's knife, but he secures a surplus utility from 
my book. He would otherwise not have given up the knife. 
The exchange is therefore mutually beneficial. The old belief 

1 The term " consumer's rent," first suggested by Marshall, is not so 
good because of the equivocal meaning of " rent." 



1 96 Measure of Value [§ 81 

that what one man (or one country) gains in an exchange 
another necessarily loses, is incorrect. Each may get a surplus 
utility. But while there is a surplus utility to each, the value 
does not necessarily change. The value of the book and the 
value of the knife remain the same. The marginal utility of one 
book would still be equal to that of one knife. If for some reason 
the book-owners found that knives were twice as useful to them 
as before, and if for a similar reason the knife-owners thought 
that books were twice as useful to them as before, the surplus 
utility of the exchange to each owner would be double what it 
was before; but the book would still exchange for the knife: 
their value would be unaltered. Value may thus remain the 
same, even when the benefits of exchange to both parties 
grow. The more varied the wants of a community, the greater 
the benefits of exchange. 

On the other hand, values may change and the surplus 
utility remain the same. If the book-owners prized knives 
twice as much as before, while the importance of books to 
knife-owners was unaltered, this very fact would increase the 
aggregate social demand for knives, and therefore the sacrifice 
that the book-owners must make^o get a knife. The knife- 
owners would make the book-owners give two books for a 
knife. The price of books would fall, and that of knives rise. 
The marginal utility of one knife would equal the marginal 
utility of two books. The surplus utility to the book-owners 
would remain the same, because, although the utility would 
increase, the cost would increase in the same proportion. In 
every exchange the cost, or sacrifice, depends on the reciprocal 
demand for the commodities. 

The surplus utility that any one individual gets from an eco- 
nomic action, therefore, has no influence on value, however 
much it may affect his own happiness. It is a result, not a 
cause. Surplus is the excess of total utility over total cost. 
Value is an expression of marginal utility or marginal cost. 
Surplus in the case of any one person is the result of an indi- 



§ 8i] Cost and Surplus 1 97 

vidual subjective estimate which differs from man to man; 
value is the result of a social estimate in which the individual 
preferences lose their significance. 

We must therefore be careful to interpret correctly the 
statement above, that marginal utility equals marginal disutil- 
ity, or cost. In an isolated economy, where there is only 
one person battling with nature, this tends to be true of the 
individual. In society, on the other hand, whatever the rate of 
exchange, it is only the social utility and social cost of which 
the marginal degrees are equal. If the knife exchanges for a 
book, it is because the demand in the community as a whole 
is such that the marginal sacrifice to a social group in parting 
with a book tends to equal its marginal pleasure in getting 
a knife. To put it more accurately, a knife wiU exchange for 
a book only because the sacrifice to society in making the 
knife, for which it receives in turn the pleasure of books, tends 
to equal the sacrifice of making the book, for which it receives 
in return the pleasure of knives. To any individual the sacri- 
fice may be less than the pleasure, but there will always be a 
marginal individual to whom pleasure and sacrifice are equal. 
The marginal pleasure in the aggregate tends to equal the 
marginal pain in the aggregate. The balance or equilibrium 
is between the pains and the pleasures of the sum of individuals. 
Where an exchange economy exists, the real equilibrium is a 
social equilibrium. 

This shows clearly that the real cost to any member of 
society which influences value is not the subjective cost to him. 
The sacrifice imposed upon society to secure anything is, as 
we have seen, the exertion needed to replace it. To replace 
an article, however, from the social point of view, is to produce 
it. For, although an individual may replace an article by pur- 
chasing it from the producer, society as a whole can replace 
an article only by producing it. Thus, when we speak of 
social cost, we really mean cost of production; and when we 
say that value is influenced by cost, we mean that value is influ- 



198 Measure of Value [§ 82 

enced by cost of production. What may be to the individual 
a subjective cost becomes, when translated into terms of 
society — that is, of value — an objective cost to him. We 
think no longer of the sacrifice imposed upon any one indi- 
vidual, but only of the social sacrifice, or cost, embodied 
in the commodity; or, rather, the sacrifice, or cost, to the 
individual is the result and reflex of the sacrifice to the com- 
munity. Just as we saw above, that the individual utility which 
affects value is the reflex of the social utility, so the individual 
cost which affects value is, as we shall see more fully in a 
moment, the reflex of the social cost. If an individual desires 
to sell a commodity, he will normally get for it not what he 
chooses, but what society as a whole fixes as the proper figure. 
He may personally be able to raise a particular horse for less 
than a particular cow; but that will not enable him to sell a 
cow for more than the usual price of a horse. His own indi- 
vidual estimate is of importance only as affecting the aggre- 
gate social estimate. Every individual gauges his economic 
well-being from the point of view of surplus, — of getting as 
much satisfaction as possible above the cost; but the cost, or 
sacrifice, which he must incur is fixed not by himself, but by 
society as a whole. A farmer will not permanently raise cows 
if his cost exceeds the social level as reflected in the price. 

82. Cost and Utility 

The failure to realize that value is a social conception has 
led to much pointless controversy. Thus Ricardo and his 
followers maintain that the value of a commodity is fixed by 
its cost of production; while Jevons and those that agree with 
him contend that value is fixed by its marginal utihty. Both 
are right, but neither is right in the sense in which he under- 
stood the terms. Cost of production is the measure of value; 
but it is not; as Ricardo thought, individual cost. Marginal 
utility determines value; but it is not, as Jevons thought, indi- 
vidual utility. Both cost and utility measure value, because, 



§ 82] Cost and Utility 199 

as we have seen, marginal social cost is always equal to mar- 
ginal social utility. In the way they frame the statement, the 
followers of both Ricardo and Jevons are correct in denying 
the other's statement, and yet err in their own. Rightly inter- 
preted, they are correct in their own statement, and yet err 
in denying the truth of the others'. Let us make this clear. 

Utility, as we know, is the fundamental quality of everything 
used by man. But utility is not sufficient to give value. For 
anything to have value its supply must be limited. The utility 
which gives it value is the marginal utility. If the supply is 
unlimited, the marginal utility is zero. Positive marginal utility, 
therefore, depends upon limitation of supply. But if the sup- 
ply is limited, it wiU cost some sacrifice to secure or to repro- 
duce it. Therefore, when we measure the marginal utility of a 
commodity, we measure the cost of securing it. Hence either 
utility or cost may be declared the measure of value. Thus, 
while marginal utility is the fundamental cause of value in the 
sense that nothing could have any value if it had no utility, 
cost may be declared to be not indeed the cause, but an 
equally good measure, of value. Regarded from this point of 
view, the discussion as to which is the real measure of value is 
as futile as to ask how to measure the sound or quality of a 
hammer's blow on a bell. Without that particular kind of bell 
there would be a different quality of sound; without that par- 
ticular kind of hammer there would likewise be a different 
quality of sound. So in economic life we deal with the de- 
mand for anything as compared with its supply. When we 
speak of utility, we think of the person who wants it, — that is, 
of the demand. When we speak of cost, we think of the per- 
son who parts with it, — that is, of the supply. But these 
interact mutually; for the demand, although reflecting the 
utility, would change if the cost were different; and the supply, 
although conditioned by the cost, would change if the utility 
were altered. To afiEirm that either utility or cost exclusively 
measures value is as incomplete as to say that either demand 



200 Measure of Value [§ 82 

or supply exclusively fixes value. Value is the expression of 
the relation between demand and supply. We cannot speak 
of marginal utility without implying cost; we cannot speak of 
marginal co^t without implying utility. 

All this is true, however, as we have seen, only of social 
cost and of social utility. The utility of anything to an indi- 
vidual figures in the determination of value only to the extent 
(in most cases infinitesimal) that the individual choice goes 
to determine or change the choice of the community. If I 
have a potato field at home, that will not obviate the necessity 
of my paying the market price for potatoes. If I am directed 
by my physician to live on potatoes exclusively, that will not 
lead the dealer to charge more than the market price. The 
demand that tells is the aggregate social demand, depending 
on the social utility. 

Conversely, tfie cost that influences value is not the cost of 
production of that particular commodity to the individual pro- 
ducer. It may take 'me two days to make with old tools a 
table which fully equipped carpenters can turn out in a few 
hours, I can get for my table no more than the carpenters 
for theirs. The carpenters can get this pp.ice for their table, 
not because it has cost them so much work, but because they 
save the members of society as a whole the sacrifice, or cost, 
of making the table for themselves. If there were no carpen- 
ters, society would tave to set to work, abandon some of the 
things it does now, and give up some of its time to make 
tables. Instead of each member of society devoting a part of 
his day to making a part of a table, society as a whole sets 
aside a certain class to make nothing but tables. But what 
society is willing to pay for the table is always the marginal 
cost to it, and this marginal cost is the final sacrifice which 
society is willing to incur for tables as compared with other 
things. What the carpenter can get for the table will adjust 
itself to this amount of social sacrifice, and thus the value of a 
commodity gets to be the equivalent of the (individual) cost 



§ s^] Surplus and Progress 201 

of producing it. We may thus roughly say that individual 
labor or cost of production fixes value; but what it really does 
is not to fix value, but to express the value that is fixed by 
social forces as a whole. The value is due not to the labor of 
the individual who has made it, but to the social service which 
it is going to render, — that is, to the social sacrifice which 
it is going to save. If it does not render that service, it will not 
possess that value, no matter how much individual labor has 
been spent on it. On the other hand, if less individual labor 
be spent on it, it will have less value, not because less indi- 
vidual labor has been spent, but because the marginal sacrifice 
of society is now less. Utility, and not cost, is the ultimate 
cause of value. 

We see, then, that value may be defined either as the ex- 
pression of marginal social utility or as the expression of the 
marginal social sacrifice incurred to secure utility. Value may 
be estimated in terms of either social utility or social cost, be- 
cause the marginal degree of the one is equal to that of the 
other. Individual cost, however, affects value only in the sense 
that it adjusts itself to the social utility, which is the supreme 
test. Utility is the positive factor, cost is a result. The exact 
relation of individual cost of production to value, however, 
still remains to be studied, and will be discussed later. 

83. Social Surplus and Progress 

Since all progress consists in getting more results with less 
efforts, the problem of social cost and social surplus becomes 
one of basic importance. All surplus or residual utility is the 
balance of satisfaction over sacrifice. It may therefore be 
augmented in two ways: the sacrifice may remain the same, 
while the satisfaction increases; or the satisfaction may remain 
the same, while the sacrifice decreases. In the one case we 
deal with problems of consumption, in the other with problems 
of production. In the one case we approach the subject from 
the point of view of utility, in the other from that of cost. 



202 Measure of Value [§ 83 

The social surplus may be enlarged by changes in consump- 
tion. The sacrifice incurred by the individuals that compose 
society may remain the same, and yet they may use so much in- 
telligence in the rearrangement of their choices of satisfaction 
that they may procure a greater net result. It need not cost 
more effort to cook a good dinner than an unpalatable one, 
and yet the surplus of satisfaction over sacrifice is greater. 
When the social choices are improved on a large scale, there 
will be a great increase in the social surplus. 

While it is possible to have in this way a larger satisfaction 
with the same effort, it happens just as frequently, however, 
that we can procure the same satisfaction with a smaller effort. 
The emphasis is here laid not upon consumption, but upon 
production. Whatever diminishes the cost of production en- 
larges to that extent the surplus of society. If the dinner 
which originally cost one dollar can now be supplied for fifty 
cents, we shall have to work less to get that dinner; or if we 
work as hard, we shall have the remaining half-dollar to spend 
on something new. All civilization depends on the increase of 
our wants. In most cases, however, the appearance of a new 
want requires additional effort on the part of individuals for 
its satisfaction. If the additional sacrifice keeps pace with the 
additional want, we are no better off than before, — there is 
no increase of the social surplus. But as soon as we can satisfy 
the old want with a smaller total effort, the surplus is increased 
because some of the efforts previously devoted to the satisfac- 
tion of the old want are now set free for the attainment of the 
new object. With the same output of energy we secure greater 
results. Diminution of social cost is the great creator of social 
surplus. 

While changes in consumption are of significance in them- 
selves, they become of great importance chiefly as engendering 
changes in production. Whether we call the social surplus, 
however, a consumer's surplus or a producer's surplus, is, as 
we know, immaterial. It is equally immaterial whether we say 



§83] Surplus and Progress 203 

that the progress is due to lower cost or to greater utility. So- 
cial surplus is the result of man's struggle with nature. It is 
the margin between result and effort. The way to increase the 
surplus is to maximize the results and to minimize the efforts, — 
that is, to increase utilities and to decrease costs. 

The mere increase of the social surplus is, however, not all 
that is necessary to progress. Without such a surplus, indeed, 
there can be no highly developed civilization; for where the 
energy of society is entirely occupied with procuring the bare 
means of subsistence, there can be no opportunity for the 
higher life. A frontier community differs from a developed 
one chiefly in the fact that in the former there is little social 
surplus available. But the mere production of wealth and 
prosperity does not suffice. Unless attention be paid to the 
problem of distribution as well, the social surplus may remain 
in the hands of a favored few — the "remnant" of whom 
Matthew Arnold sings — while the mass of the community 
may be largely shut out from participation in its benefits. 
The real democracy of industry, like the true democracy of 
politics, does not mean that every man is the equal of every 
one else, but that all should have an equal opportunity to de- 
velop what is in them for good. The problem of social progress 
is to reconcile the greatest possible social production with the 
best possible social distribution; to create a continually grow- 
ing social surplus and to provide for its equable division. 
Without the latter we are apt to have plutocracy; without the 
former we can scarcely rise above savagery. 



CHAPTER XIV 
THE CAPITALIZATION OF VALUE 

84. References 

J. B. Clark, Distribution of Wealth (1899) , ch. ix; F. A. Fetter, Economic 
Principles (1915), part i; T. Veblen, Theory of Business Enterprise 
(1904), chs. v-vi; M. Pantaleoni, Pure Economics (1898), part 3, ch. 
iii, § 5; E. V. Bohm-Bawerk, Positive Theory of Capital (1891), bk. 
V, chs. i, ii; F. v. Wieser, Natural Value (1893), bk. iv, ch. vii; H. 
Sidgwick, Principles (1883), II, ch. vi; J. A. Hobson, Economics of Dis- 
tribution (1900), ch. iv; Irving Fisher, Capital and Income (1906); H. J. 
Davenport, The Economics of Enterprise, (1913), ch. 14-15; W. Z. 
Ripley, Capitalization of Public Service Corporations (Quart. Jour. Econ., 
XV, 1901); E. S. Meade, Trust Finance (1903), ch. xvi; R. M. Hurd, 
Principles of City Land Values (1903), ch. ix. 

85. Value and Rent 

We have learned that the value of anything is derived ulti- 
mately from the satisfactions or uses which it affords, and that 
the price is the money equivalent of its uses. Some things 
afford only a single use; the use of an ordinary article of food 
consists in its consumption. Other things are somewhat more 
durable; a suit of clothes can be used for a season or two be- 
fore it is worn out; a machine will last for years; a house for 
decades. Finally, some things permit of perpetual use. A 
city lot will serve as a building site as long as the city exists; 
the privilege granted to a street railway to occupy the public 
highways remains the same from decade to decade, although 
the recipient of the privilege may change. 

Things can be sold either by parting with their uses one by 
one or by disposing of all their uses for a lump sum. When I 
ask, what is the price of a carriage? the owner will answer, ten 
dollars a day if he means the price of the use for that period, or 

204 



§ 85] Value and Rent 205 

a thousand dollars if he refers to its use as long as it lasts. 
When we part with the use of a thing for a limited period, the 
payment is called a rent. We may rent a horse for an hour, or a 
dress-suit for an evening, or a typewriter for a month, or a house 
for a term of years. Strictly speaking, the word rent regards 
the transaction from the standpoint of one who lends the 
use and secures a periodic return {redditus)] while the word 
hire designates the transaction from the point of view of the 
one who enjoys the temporary use. Commonly, however, 
this distinction is disregarded, and we speak indiscriminately 
of a man hiring or renting a yacht or a house for his own use. 
The fundamental conception is the income, in the sense of 
pleasure or benefit income, to the user. Through the opera- 
tion of the social forces which bring about exchanges based on 
money, the income value of anything becomes its money rent, 
— the amount of money received by the owner or paid by the 
hirer. The income of anything is the rent paid or received 
for its use. 

Sometimes the word rent is limited to particular kinds of 
rents. In England, for example, where land formed the chief 
form of investment even as late as the eighteenth century, 
rents came to be synonymous with land rents, and when a man 
spoke of his rent roll, he meant the rentals which he received 
from his estate. As a consequence, the theory of rent elabo- 
rated by the English economists came to have a peculiar 
meaning. On the other hand, France, in the century before 
the revolution, had made greater progress in general financial 
enterprise, and rentes came to mean the income of the fund- 
holder. A rentier to-day still denotes one who is living on the 
income of his capital. As a general economic conception, 
then, rent is the periodic return (nowadays calculated in 
money) from the use of a thing for a definite period, whether 
that thing consists of land, or public funds, or anything else. 
Rent has a threefold aspect, (i) From the point of view of 
the economic good, rent is the product: the use that a thing 



2o6 Capitalization of Value [§ 86 

affords is its product or rent. (2) From the point of view 
of the owner, rent is the income from the use or product. 
(3) From the point of view of the hirer, rent is the cost or 
payment for the use. People pay rents because they receive 
in return an income in the shape of the use afforded by the 
things for which they pay. Rent therefore is at once product, 
income and cost. 

When we part with anything permanently, instead of with 
some of its uses for a time, we often speak of its selling or 
market or cash value, as opposed to its rental value. Strictly 
speaking, this contrast is inaccurate. When we rent anything, 
we are also dealing with selling value; but what we sell is a 
single use, or several uses, rather than all its uses. Sometimes 
again we speak of property value as opposed to rental value. 
The advantage of this nomenclature is that as long as we con- 
trol the property we control all possible present and future 
uses; the disadvantage is that property is a legal conception, 
while rent is an economic conception. A man also has prop- 
erty in his rents. The real contrast, as was pointed out above 
(§ 6), is between rental value, in its strict meaning of income 
value, and capital value. When a man sells one or more uses 
of a thing, he estimates its capital value. Roughly speaking, 
he rents in one case and sells in another; strictly speaking, 
he sells in both cases, but the price represents a limited use 
in one case and an unlimited use in the other. 

The question now arises, what is the relation of rental value 

to capital value, and how do we come to estimate capital 

values? 

86. The La-w of Depreciation 

The durability of economic goods is essentially relative. At 
the one end, as we have seen, are the merely ephemeral acts 
or the things which are consumed by a single use, like a paper 
napkin or an apple. At the other end is a building site, which 
can support a structure to the end of time. Between these 
extremes He the great mass of commodities. They all wear out 



§ S6] Law of Depreciation 20*7 

sooner or later, and as they wear out they become incapable 
of affording as many or as effective uses. Sometimes the de- 
preciation is rapid, as with a flimsy silk dress; sometimes the 
commodity lasts longer, as in the case of an ordinary machine; 
sometimes it is very substantial, as in the case of a modern sky- 
scraper. In every instance, however, if it is intended to be 
used permanently, repairs are needed. Nothing is indestruc- 
tible except land, and even that is so, as we shall see later 
(§ 132), only in the peculiar sense that its extension remains. 
It is obvious that the capital value of anything depends in the 
first instance on the number of rental values, allowance being 
made for wear and tear. Where the good is ephemeral in the 
sense that it affords only a single use, the rental value and the 
capital value coalesce. The rental value is the capital value. 
We cannot buy the privilege of using the coal or ice even once, 
without buying the coal or ice itself. The wear and tear here 
equal the entire value, the single use is the consumption. 
When, however, we may expect a moderate succession of uses, 
there is a difference between the rental value and the capital 
value. Where the depreciation is rapid the difference is not 
great. A row-boat is quickly worn out, and even a single use 
may injure it severely. A boat which sells for sixty dollars 
will often rent for half that amount for a single summer, and 
the capital value is then only double the annual rental value. 
The boat may last for several years, but the older it grows, the 
greater the need of repairs and the smaller the net uses which 
it is capable of yielding, until finally the expense of repair 
exceeds the income, and the boat is thrown aside as worthless, 
possessing no capital value because it no longer has a single 
rental value. Where a larger number of uses can be enjoyed 
with comparatively little depreciation, as in a well-built house, 
the selling value is frequently ten or twenty times the annual 
rental value. It may be four or five years before any repairs 
are needed, but with each ensuing year the decay progresses 
and the cost of repairs augments, until here also the time ar- 



2o8 Capitalization of Value [§86 

rives when there is no longer any surplus of income over outgo, 
of enjoyment over exertion. In practical life business men 
guard against the results of depreciation by instituting a sinking 
fund. Instead of spending all the earnings, they set aside an 
annual sum which will counterbalance the depreciation, so that 
at the end of a period the accumulated fund will sink or offset 
the outlay incurred to replace the commodity. The repairs, 
in other words, may be made from year to year, or may be 
allowed to accumulate, and made all at once at a subsequent 
period. Where no repairs are possible, as in a mine, the an- 
nual rent must still exceed that of ordinary land which osten- 
sibly yields the same annual returns, because the mine will 
ultimately be exhausted and a part of the rent must be put to 
the sinking fund or depreciation account, or goes to satisfy the 
expectation that the rental value will cease. 

The fundamental explanation, therefore, of the relation of 
capital value to rental value is durability, or the degree of 
succession of rental values. Capital value depends on net 
rent, not on gross rent; that is, it depends on the succession 
of gross returns, less repairs. Capital value is reached by 
adding together the gross rentals and deducting the sinking 
fund. The ratio of capital to rental value depends in the first 
instance on the number of rental values. 

This does not mean that more permanent commodities have 
a greater capital value than less durable goods. Iron has less 
value than silk, although it is far more durable. The statement 
means that when the gross rental of two commodities is the 
same — that is, when the price paid for the use of each for a 
definite period is identical — the difference in their capital 
values is to be explained by the relative number of such uses 
which each can afford. The rent of a house, as well as that of 
a horse, may be twenty dollars a month, yet the house will sell 
for far more than the horse. Neither would have any capital 
value if it had no rental value. The rental value of both is the 
same, because the marginal utility of a month's use of each is 



§ 8;] Law of Future Estimates 209 

identical; that is, the individuals forming that economic group 
get on the whole as much satisfaction out of a horse as they 
do out of a house. The capital value of the horse, however, 
is less than that of the house, because he will be more quickly- 
worn out, — that is, because he cannot furnish an equally long 
succession of uses. 

Capital is capitalized income. Capital value is a stock or fund 
of rental values; the larger the number of such rental values 
which flow in from a commodity, the greater will be its capital 
value in proportion to its rental value. The relation of capital 
to rental value depends in first instance upon durability. 

87. The Law of Future Estimates 

The uncivilized individual lives only in the present. His 
wants are spasmodic, and as soon as he has gratified these 
pressing needs he has no thought for the morrow. With every 
advance in culture he displays more prudence and foresight. 
Even some of the more highly developed animals, like ants, 
bees and squirrels, have an eye to the future, and in the time 
of plenty lay in a stock for the days to come. The philoso- 
phers tell us that the real pleasures of life are those of antici- 
pation and retrospection. But this is true only of the most 
highly organized natures, and true only in part even of them. 
To the mass of individuals present needs and present satisfac- 
tions are the all-engrossing ones. 

The result of this psychological fact is that we lay more 
stress on present enjoyments than on future enjoyments. To 
the average man a bird in the hand is worth two in the 
bush, even though he thinks that he will secure the two. 
Our estimate of the future is more or less uncertain, because 
we can never be absolutely sure of anything but the actual. 
The future may have in store for us either some change in the 
intensity of our wants or in the capacity of the particular ser- 
vice to satisfy our wants. Present wants and satisfactions are 
definitely measurable, because the degree of the one and the 
14 



2 1 o Capitalization of Value [§ 87 

quantity of the other are fixed. Future wants and satisfactions 
are less definitely measurable, because of the concurrent or 
opposite changes that may take place before the future ripens 
into the present. Hence the underestimate of the future as 
compared to the present. That is what we mean when we 
speak of discounting the future; we "count off a part of the 
enjoyment to come. 

The law of lower future estimates is a part of a larger law, 
with one aspect of which we have already become familiar. 
All sense impressions may be reduced to those of space and 
of time. When we deal with space impressions and apply 
them to economic life, we are in presence of the law of dimin- 
ishing space utility; every additional increment in the supply 
of an actual commodity existing in space has, as we know 
(§ 73) J ^ decreasing importance. When we deal with time im- 
pressions, we are in presence of the law of diminishing time 
utility; every additional postponement in the enjoyment of a 
commodity causes it to have a decreasing importance for us. 
Nothing has utility unless it exists in space and time. In- 
crease the space relation, that is, augment the supply, and you 
decrease the marginal utility; increase the time relation, that is, 
postpone the gratification, and you again decrease the mar- 
ginal utility. In one case we deal with a margin of space; in 
the other with a margin of time. The effect is the same. 
Increase the supply to a certain point, and the marginal utility 
or value will disappear; augment the postponement of the sat- 
isfaction to a certain point, and the marginal utility or value 
will likewise disappear. 

The present estimate of a future satisfaction is therefore 
ordinarily less than that of a present satisfaction; the present 
value of a future enjoyment is less than that of an immediate 
enjoyment. The present estimate of future uses becomes 
fainter as the use recedes into the future, until the value of 
a very distant use vanishes. Therefore, while a commodity 
with a present rental value may hold out the prospect of 



§ 87] Law of Future Estimates 211 

many successive rental values, the present worth of each of 
those future rental values becomes progressively smaller. Since 
the capital value of anything is the present worth of all the 
successive future rental values, it is clear that the dispro- 
portion between the rental and the capital value will not grow 
simply with the durability of the commodity; for the more 
durable the commodity, the fainter will be the present estimate 
of the distant use, until finally a further increase in durability 
will add nothing to the value. A building site may rent for a 
fixed sum, and may reasonably be expected to yield that rent 
for an indefinite period. Yet when it is sold it will bring as 
capital value a sum equivalent to only about twenty or twenty- 
five times the rental value. There is no depreciation of the 
land, there is no wear and tear, and no necessity for a sinking 
fund, and yet the land is worth, as it is called, only twenty 
years' purchase; that is, it can be purchased for a sum twenty 
times the annual rent, even though in all human probability it 
will go on yielding an annual rent for an indefinite future. 

The relation between rental and capital value, therefore, is 
a resultant of two forces, — the law of depreciation and the 
law of future estimates. From one point of view, the more 
durable the commodity and the larger the number of successive 
uses, the greater will be the disproportion between rental and 
capital value; from another point of view, the more durable 
the commodity and the more remote the succession of future 
uses, the less will the disproportion be. Both of these state- 
ments may be summed up in the assertion that the capital 
value of anything is the result of adding together the present 
worth of each of the successive rental values. If the com- 
modity lasts long enough to furnish two equal annual rental 
values, the capital value will be slightly less than twice the first 
rental value; if we may expect three rental values, the capital 
value will be somewhat less than three times the first rental 
value. Each increment which goes to form the capital value 
decreases, until finally there is no further increment at all. 



2 1 2 Capitalization of Value [§ 88 

88. The Law of Diminishing Returns 

We have thus far dealt with consumers' goods — that is, 
articles of immediate consumption — and have seen that their 
value is derived from the uses or enjoyments which they afford. 
Some goods, however, do not afford a direct enjoyment, but 
are used as instruments to produce things that afford enjoy- 
ments. These are hence called indirect, or instrumental, or 
production goods. It is obvious, however, that just as the 
capital value of consumption goods is derived from their rental 
values or uses, so the value of production goods is derived 
from the value of their products, — the consumption goods. 
The value of the raw material is due to the value of the finished 
commodity. The value of pig iron depends upon the value of 
the nails, billets and other iron products into which it enters. 
The value of labor depends on the value of what the labor 
produces. Value starts with direct human satisfactions, and 
is reflected back and back until it attaches to the original 
agent, act or thing which is ultimately responsible for the 
immediate income or inflow of satisfaction. 

The fundamental law of value is the law of diminishing 
utility. The satisfaction derived from successive increments 
of a consumption good diminishes as the supply increases. 
When, in the same way, we compare the utility of different 
increments of production goods or productive agents with one 
another, we are in the presence of the law of diminishing 
returns. Instead of the diminishing utility of direct services 
afforded by something consumed, we think of the diminishing 
return or service afforded by something in producing the 
economic good which we consume. If a man tends one loom, 
he will turn out a certain quantity of cloth. Double the looms 
and he will do double, or perhaps more than double, the work; 
give him four looms and the output will be fourfold. After a 
certain limit is reached, hov/ever, the care of each additional 
loom will dissipate his energy and cause more mistakes. The 



§ 88] Law of Diminishing Returns 2 1 3 

total output may be larger, but the output of each loom will 
be less, until finally new looms will not augment the output 
at all. If we enlarge the supply of labor instead of tools, the 
same holds good. More effort means, after a given point, 
relatively smaller results. A rower may increase his speed 
by putting forth more exertion, but after a certain point more 
efforts do not mean greater speed. An increase of rowers 
will not change the law. Two men will not row a boat twice 
as fast as one, four men will not row it twice as fast as two. 
A large omnibus will hold more people than a small one, but 
when a certain size has been reached, it will pay better to buy 
another omnibus than to enlarge the old one. On a piece of 
land it may be profitable to employ more men as well as to 
use more manure and better machinery; but after a given 
point, additional " doses'' of labor and capital will begin to 
give relatively smaller results. The law of diminishing returns 
is universal. It is another aspect of the law of diminishing 
utility. The latter springs from the finite nature of man, the 
former from the finite nature in the elements of his environ- 
ment. The income or return from a production good or 
productive agent is like the income or utility of a consumption 
good. The test of each is its relative contribution to the 
satisfaction of wants. 

Just as the law of decreasing utility results in the conception 
of marginal utility — the foundation of all value — so the law 
of diminishing returns results in the conception of marginal 
utilization. This margin is the point beyond which an addi- 
tional effort will not give a sufficient return. The margin 
may be either intensive or extensive. If we crowd more 
people into the same omnibus, or run more trains over the 
same track, or make the laborer tend more looms, or put more 
manure into the same field, we have a more intensive utiliza- 
tion, until finally the intensive margin is reached where the 
additional returns will not compensate the additional effort 
or outlay. On the other hand, the crowding of the omnibus 



214 Capitalization of Value [§89 

may drive passengers to another line, the multiplication of 
trains may cause accidents, the added looms may mean more 
breakage, the increase of manure may be unduly costly. In 
such cases the owner will find it profitable to purchase new 
vehicles, build a double track, hire more workmen, or secure 
additional plots of fresher land. This would be an extensive 
utilization, carried on until the extensive margin is reached, 
when it will not pay to add another vehicle, track, laborer or 
plot. The margin, whether intensive or extensive, is reached 
through the operation of the law of diminishing returns. Just 
as the value of every consumption good depends upon its 
marginal utility, so the value of every production good or 
productive agent (which is derived from the consumption 
goods which it produces) depends upon its marginal product, 
that is, its product at the margin of utilization. 

89. Forms of Value 

If we analyze the things that are bought and sold in the 
market we find that they may be divided into four classes: 
first, human services, from those of the day laborer to those 
of the highest professions; second, concrete goods, or com- 
modities, whether production goods or consumption goods; 
third, relations and privileges of all kinds; fourth, a fund of 
capital. 

In the first class obviously only the single use can be 
sold. A service is a use, it is not a fund of stored up uses. 
Here, then, the selling price of the economic good (the 
service) is the rental price. We speak of hiring a man, just 
as of hiring a piano. When we hire him for a definite task, 
we rent his service; if we engage him by the day or month or 
year, we rent a limited succession of services. The only way 
in which all the services of the man can be sold at once is 
when he is a slave, and thus acquires a definite money value 
as a piece of property. In a state of freedom a man never 
parts with all his future services for a lump snm. The price 



§ 89] Forms of Value 2 1 5 

paid for human services is not commonly called rent, although 
we do speak of an Italian padrone in America renting 
out his immigrant compatriots, or of the Southern prison 
officials renting out their convicts. Ordinarily the income 
derived from human service is called wages (or, in the case 
of the professional classes, salaries or fees). Wages, then, are 
always income; they are never capital, nor can they be 
capitalized except in the case . of slavery. It is only then 
that we can properly speak of human capital, or of capital 
invested in human beings. 

The next two categories, which, as we shall see later, differ 
in important ways, may be classed together in this respect^ that 
they both possess a rental or income value as well as a capital 
value. A piece of land, a ship and a patent right may either 
be rented out from year to year or parted with entirely for a 
lump sum. Their product is always a rent, although the rent 
may be capitalized. 

Finally, as opposed to individual economic goods which 
have a capital value, there is the general fund of capital. Just 
as we speak of wealth in general as consisting of pieces of 
wealth, or of labor in general as composed of the individual 
laborers, so we speak of capital in general as the assemblage 
of individual pieces of capital. Capital as a general concep- 
tion stands in the same relation to the individual pieces of 
capital as a flock does to the sheep or a forest to the trees; 
the sheep and trees are constantly disappearing and being 
replaced by new accessions; the flock or forest persists, 
although the constituent elements are perpetually changing. 
Capital as a fund of wealth is the embodiment of value or 
purchasing power, and money is everywhere the measure 
of general purchasing ' power. Capital, therefore, as a fund 
of value can be estimated or transferred in the shape of the 
money which represents this value. We cannot buy the flock 
of sheep without buying the individual sheep, but through 
the interposition of money and credit we can acquire capital 



2 1 6 Capitalization of Value [§ 89 

in the shape of general purchasing power, and then devote it 
to any use we desire. We can use it in production and build 
a factory, or we can use it for consumption and buy a yacht. 
We can put the fund of capital into concrete goods like 
machines or land, or into privileges like franchises or patents. 
When we buy capital in general, therefore, we buy the right of 
enjoying any future uses that we may elect; we are not restricted 
to the particular uses afforded by the individual good in which 
our capital is temporarily embodied. The use of the sheep is 
limited; the use of the capital invested in the sheep is poten- 
tially unlimited, because it can be changed at will to any other 
form. 

When we purchase the temporary use of an individual 
economic good, therefore, we pay a rent; but when we pur- 
chase the temporary use of a fund of capital in general, the 
payment is called interest. Interest, hence, is nothing but 
commuted rent, just as capital is nothing but capitalized 
income. Instead of hiring a particular piece of capital and 
paying rent, we hire a fund of capital in general and pay 
interest. Interest, then, is not paid for money, but for the 
capital which the money represents. It is really not paid for 
the capital, but for the uses afforded by the capital when 
transmuted into the individual things which afford services. 
Interest of capital is based upon the rents of individual pieces 
of capital. The single thing yields a rent because it affords a 
return or product. If we add together all the net rents of 
existing goods or pieces of capital, we get the entire amount of 
interest. Total net rent at any given time is equal to total 
interest. Each consists of the whole of the product or income 
from all existing wealth which is or can be capitalized, — that 
is, of the aggregate of the return from all existing pieces of 
capital. The only difference is that interest is the calculation 
form of rent. Rent is figured in dollars and cents; interest 
as commuted rent is figured as a part of the whole or as a 
percentage of a principal. The rent of a house is so many 



§ 9o] Value as a Differential 217 

dollars a year, the interest of the capital invested in the house 
is so much per cent a year. 

Wages, rent and interest, therefore, are analogous phenom- 
ena. They are all prices, even though prices in the language 
of the street are ordinarily restricted to the selling values of 
concrete objects. When we contrast wages and prices, we 
really contrast prices of human services with prices of things; 
when we contrast rents and prices, we really contrast rental 
values of things with capital values of things. Wages are the 
price of the services of man; rent is the price of the services 
of particular things and relations, that is, particular pieces of 
capital; interest is the price of services of the general fund of 
capital. At the one end is labor, which can never be capital- 
ized; at the other end is the fund of capital, which is always 
capitalized; in between are the individual economic goods, 
whose services may or may not be capitalized, and for which 
people will pay either rents or so-called prices. 

90. Value as a Differential 

All value may be considered as a differential. In each 
variety of goods there will be different grades corresponding 
to different uses. A good boat will rent for more than a poor 
one; and if it is "no good" at all, it will not rent for any- 
thing. Rent therefore may be measured as a differential from 
a margin or base line of no-rent, and the rent of anything may 
equally well be defined to be the differential return or surplus 
over the no-rent or marginal articles of the class. 

It must, however, not be forgotten that almost everything 
is susceptible either of more than a single kind of use or of 
different uses to different people. The boat may be useless for 
sailing, but good for rowing; it may be useless for rowing, but 
excellent for firewood. A piece of land may be of no use for 
wheat-raising, but good for alfalfa; it may be useless for alfalfa, 
but admirably adapted to pasture. The margin or base, there- 
fore, from which rents are calculated may be only a relative 



2 1 8 Capitalization of Value [§ 90 

and not an absolute no-rent margin. The rent of a particular 
plot of good wheat land may be calculated as the surplus 
produce over the worst plot at the margin; but that no- wheat- 
rent plot may yield a substantial rent as perhaps the best 
of pasture plots. It is only when a given object is of no 
use for any purpose that we can speak of an absolute no-rent 
margin. 

Since therefore the uses of things shade into each other, we 
can take any use as a margin or base from which to measure a 
higher use. The rent of anything may be regarded as a differ- 
ential surplus over a lower use, or as a margin from which to 
measure a higher use. All value is the expression of marginal 
utility; each margin is relative as compared to some other 
margin. Rent as the quantitative expression of this marginal 
utility may be estimated either as a whole or as a surplus over 
something else. 

In precisely the same way capitalized rent, or selling value, 
may be regarded as a surplus. If a fine sail-boat sells for one 
hundred dollars, we can regard twenty dollars as a surplus 
value of a fine boat over a poorer one; another twenty dollars 
as a surplus of a poor sail-boat over a good row-boat; and so 
on until finally the last of the hundred dollars will represent 
a surplus of the worst boat over a boat which is not even good 
enough to use as firewood. Again, what is true of rent is true 
of wages. Rent is the income from things, wages the income 
from acts; both are the income from services. The wages of 
a particular man or class may be regarded as a surplus over 
the wages of a lower grade class, until finally we get to the 
individual who receives no wages at all because he is of no 
use, and who, if he survives, must be supported by the com- 
munity. The law of wages must be the same as the law of 
rent, because wages are really rents of a certain kind, rents of 
acts instead of rents of things. When therefore the traditional 
discourses of economics speak of the rent principle, or of 
"quasi-rents," in the sense of temporary instead of permanent 



§ 9ol Value as a Differential 219 

or normal surpluses, they are correct as far as they go, but do 
not go far enough. What they really mean is the differential 
principle, which is true of all incomes, whether land rents or 
other rents, whether rents in general or other selling values, 
whether the income of things or that of services. 

When we deal with the fund of value known as capital in- 
stead of with individual pieces of capital, we are also in the 
presence of a differential, but in another sense. Individual 
commodities differ in grade of utility, and therefore their rents 
(and capital values) differ. Capital as a fund, on the other 
hand, is the money value of all existing commodities lumped 
together. Individual commodities are heterogeneous; the 
fund of capital is homogeneous. There is no general rate of 
rents; there is a general rate of interest. Hence interest 
cannot be a differential in the same sense as rent. Yet the 
word ''interest" itself means difference. Interesse in Latin was 
the sum that lay between {inter) the original loan and its 
return. Although the mediaeval writers confused money and 
capital, thinking that interest was paid for the use of the 
money itself^ they nevertheless justified interest, so far as it was 
a recompense for the delay in repayment. We who now know 
that interest is a method of calculating rent realize that it is 
not simply a question of delaying repayment, but of postpon- 
ing enjoyment, and that interest may be measured not only 
positively, but as a differential or surplus of present over future 
values. 

Interest, in other words, is a discount, or difference between 
the present and future. When a banker discounts a bill, he 
deducts from the face value a sum equivalent to the interest 
for the period the bill has to run. Both rent and interest, 
therefore, as forms of value, express an estimate of marginal 
uses. Rent regarded as a differential deals with the marginal 
uses in space; interest regarded as a differential deals with the 
marginal uses in time. Rent is the difference in the value of 
one present enjoyment over another; interest is the difference 



2 20 Capitalization of Value [§91 

in the value of a present over a future enjoyment. How the 
estimate of this difference, or the rate of interest, is arrived at 
in actual life is a matter for later consideration (§ 167). 

91. Relation of Rental and Capital Values 

Since interest is commuted rent and capital is capitalized 
rent, it might be assumed that rental values and capital values 
of the same things would always vary together. If a house 
rents for the same amount in New York as in Yukon, or if a 
house to-day rents for as much as it did ten years ago, ought 
not the capital value to be the same? In point of fact, how- 
ever, there is no such exact correspondence between rental 
and capital values. This is due to several causes. 

In the first place, the rate of capitalization is only another 
way of describing the rate of interest. The rate of interest, 
however, or the degree of discounting of the future, differs from 
place to place and from age to age. The rental value, that 
is, the income, of a given railway bond not so long ago was six 
dollars a year, and its capital value one hundred dollars. In 
1905, with no changes of importance in the character or the 
earnings of the railroad itself, the same bond, with the same 
income, was worth half as much again. This increase of fifty 
per cent in the proportion of capital value to rental value was due 
to the fall in the general rate of interest on all similar capital 
from six to three or four per cent. The discount on future en- 
joyments had appreciably diminished. What is true of the part 
of a fund of capital represented by bonds, is true of the indi- 
vidual pieces of capital like a house. Two houses that rent for 
the same amount in New York and Yukon will sell for very dif- 
ferent sums, because the rate of interest is low in New York 
and high in Yukon. The cause of changes in interest will be 
studied later. 

Secondly, since capital value depends on an estimate of 
the future, it is often much more uncertain than rental value. 
It is affected by all sorts of hopes and fears. It is subject 



§ 9i] Rental and Capital Values 221 

to the play of speculation. Rental value deals with the 
present moment or the immediate future; we are reasonably 
certain, so far as anything mundane is certain, of the exact 
quantum of enjoyment. Capital value as a summation of 
more or less distant enjoyments is exposed to all the muta- 
tions of human experience. The same rental values may 
mean now relatively high, and now relatively low, capital 
values. A comparison in 1901 of 47 industrial corporations 
with 37 railroads showed earnings of 13.6 per cent on the 
market value of the industrial stocks, and 4.85 on that of 
railroad stock. The same income or rental value, in other 
words, represented a difference of almost 300 per cent in 
capital value. Rental values, no matter how they fluctuate, 
are more stable than capital values. That this is true of the 
fund of capital is obvious to any one who watches the transac- 
tions on the stock exchange. That it is equally true of indi- 
vidual pieces of capital can be seen when we remember that 
in the ante-bellum days of the South, when negroes were 
simply a part of capital, the rental price of slaves in 1820 and 
i860 remained at about the same figure, $110, while the 
capital value of slaves increased from a few hundred dollars to 
$1500 or $2000. This growing disproportion between capital 
and rental value was indeed due in part to the fall in the rate 
of interest, but in far greater measure to the over-capitalization 
of slaves resulting from the peculiar economic conditions of 
the time. 

Finally, in the third place, where there are special advan- 
tages in the permanent as opposed to the temporary possession 
of certain things, capital values will be relatively higher than 
the rental values. In England a country estate is prized for 
the social and political advantages it brings, — and these ad- 
vantages accrue not to the annual tenant but to the owner. 
It is not surprising, therefore, to find that at the end of the 
eighteenth century land in England was worth from twenty- 
eight to thirty years' purchase, while funded property was worth 



222 Capitalization of Value 



91 



only from sixteen to eighteen years' purchase. The dispro- 
portion is less to-day, but still appreciable. 

Capital value is therefore always based on rental value, but 
their relation is not constant. It becomes necessary, there- 
fore, to go a step further and to study the causes which fix 
values in general and which, in explaining relative variations, 
will throw more light on the relation itself. 



CHAPTER XV 
DETERMINATION OF MARKET VALUE 

92. References 

M. Pantaleoni, Pure Economics (1898), part 2, chs, i-iii; A. Marshall, 
Principles (1910), bk. v, chs. i-ii; J. S. Nicholson, Principles (1901), bk. 
iii, chs. iii, iv; E. v. Bohm-Bawerk, Positive Theory (1891), bk. iv, chs. 
i-vi; F. V, Wieser, Natural Value (1893), bk. ii; A. T. Hadley, Eco- 
nomics (1896), ch. iii; H. Sidgwick, Principles (i8gs) , bk, ii, ch. ii; A. W. 
Flux, Principles (1904), ch. iii; H. R. Seager, Principles (19 13), ch. vii; 
J. E. Cairnes, Leading Principles (1874), part i, chs. ii, iv; J. A. Hobson, 
Economics of Distribution (1900), ch. i; F. A. Walker, Political Econotny 
(1888), part 3, ch. i; F. W. Taussig, Principles (191 1), ch. x; P. H. 
Wicksteed, The Common Sense of Political Economy (1910), chs. vi-viii. 

93. Demand and Supply- 
All value, as we know, is the reflex of social marginal utility. 
We have now to study the nature of the social forces which 
operate to translate into actual prices on the market the feel- 
ings of the individuals that comprise the group. 

For the purposes of our immediate study it makes no differ- 
ence whether we are dealing with rental or capital values, or 
again with values of services or values of things. The general 
principle of value must be true of all kinds of value. It will 
suffice in this chapter to take as a type the capital or selling 
value of ordinary consumption goods, remembering that every- 
thing here said is equally applicable to all other forms of value. 
It is a truism to affirm that value depends on demand and 
supply. Strictly speaking, demand denotes desire. Since 
one's desire for anything diminishes with additional incre- 
ments, demand is, strictly speaking, the scale of the degree of 
utility. A given scale affords the law of demand. If one's 

223 



2 24 Market Value [§ 94 

desire for anything for some reason increases, so that he is 
willing to give more for the same amount, we might in this 
sense speak of a rise in the demand, that is, a change in the 
scale of demand. On the other hand, if there are several 
people who prize the commodity differently, a fall in the price 
would enable more individuals to satisfy their desire, even 
though the scale of demand of each remained unaltered. There 
would really be an extension of the consumption, but not of 
the demand. 

Yet in the ordinary language of economic life demand means 
not simply desire, but effective desire, — a desire which will 
have some effect in the transactions of the market. Demand 
has therefore come to mean elliptically the quantity demanded 
at a given price; and when we speak of a change in the demand, 
we refer not to any alteration in the subjective scale of desire, 
but to a change in the amount asked for. 

In the same way supply has come to mean the quantity 
offered at a given price in the market. It no longer denotes 
the total amount in existence. That part of the total stock 
which is not offered for sale at a definite price is not an effective 
supply. The grain or cotton that is allowed to rot in the barn 
or on the fields has no influence on the price. 

94. Market and Normal Price 

By a market was originally meant a place in which individuals 
met for the exchange of commodities and services. Nowa- 
days a market means a coming together of offers and demand 
for economic goods, irrespective of the physical presence of the 
contracting parties. The market may be local, national or in- 
ternational; wherever definite quantities of goods are bought 
and sold, there is a market, and the price at which the exchange 
is effected is the market price. 

From the nature of the case this price is subject to tempo- 
rary variations, — the higgling of the market, as Adam Smith 
called it. The point about which the market price oscillates 



§ 94] Market and Normal Price 225 

is called the normal price, and sometimes, although less hap- 
pily, the natural price, as being the point to which the price 
would naturally gravitate if there were no oscillations. Mar- 
ket price is like the surface of the water agitated by the winds, 
— the waves are now above, now below the surface; yet as 
long as the winds persist we never see the glassy surface. The 
alternate activity of buyers and sellers is the wind of commerce, 
which prevents the normal price from becoming visible. 

Normal price itself may be regarded from two points of view. 
If the conditions of production and consumption are perfectly 
stationary — that is, if there are no changes in population, 
amount of capital, methods of production or social demand — 
we speak of static conditions. Such a state is largely hypotheti- 
cal, because in all progressive society conditions are continually 
changing or dynamic. The law is one of movement, not of 
rest. Yet the study of static conditions is important. Static 
normal value is like the level of a pond; we can study it only 
on the assumption that there is no motion of any kind. Dy- 
namic normal value is like the level of an ocean bay, where 
the tide ebbs and flows and the level is slowly changing; mar- 
ket value is like the surface when agitated by the wind. To 
ascertain the laws of value we must not only study the forces 
that produce the higgling of the market, — that is, the winds 
that disturb the surface; we must also study the forces which 
change the level of prices, — that is, the strength of the tidal 
current and the conformation of the shores; we must finally 
study the causes of the original level itself, — that is, the source 
of the supply, the volume of the water and the depth of the 
bed. For instance, wages in America oscillate from season to 
season, they have changed from century to century, and at 
all times they have been on a different level from European 
wages. 

We begin, therefore, with the study of market value. We 
must, however, first understand the conditions that make ex- 
change itself possible. 
15 



226 Market Value [§ 95 



95. The Conditions of Exchange — The Law of Compara- 
tive Utilities and Comparative Costs 

Let us suppose that A possesses salt and B tea, and that each 
is wilHng to trade. All that is necessary to an exchange is that 
A's liking for tea as compared to salt should be different from 
B's. It is not necessary that A's preference should be the 
opposite of B's. Both A and B may like tea more than salt, 
but if A likes a pound of tea four times as much as a pound of 
salt, and B only twice as much, they will be willing to exchange. 
If three pounds of salt are given for one of tea, A will be satis- 
fied, for he would have been willing, if necessary, to give another 
pound of salt for the tea; and B will be satisfied because in- 
stead of the two pounds of salt, which he considers the equiva- 
lent of a pound of tea, he gets three pounds. Nor does the 
fact of an exchange tell us anything about the absolute prefer- 
ences of the two parties. If A and B are willing to trade tea 
and salt, pound for pound, it does not follow that A likes tea 
more than B, or that B likes salt more than A. A may like 
salt more than B and yet give it up, provided he likes the tea 
much more than salt, and at the same time likes both tea and 
salt much more than B does. Suppose A gets ten units of satis- 
faction from a pound of tea and five from a pound of salt, while 
B gets one unit of satisfaction from a pound of tea and two 
from a pound of salt. B will then give up the tea because he 
saves one unit, and A, although he likes salt more than B does, 
will give it up because* he saves five units. 

The fact of exchange thus tells us only that A's liking for 
salt as compared with tea is different from B's; it tells us 
nothing as to whether A likes salt more than tea, or whether 
A likes either salt or tea more than B. In technical language, 
an exchange tells us only that there is a disparity in the mar- 
ginal utilities of the articles for the two parties, or that there is 
a difference in the reciprocal demand; it tells us nothing as to 
the marginal utility of either commodity for either party. The 



§ 96] Rate of Exchange 227 

rate of exchange depends on the degree of this disparity, and 
the law of exchange may be stated as the law of comparative 
marginal utilities, or the law of reciprocal demand. 

A and B, however, had to secure their salt and tea. It cost 
them something. A difference in reciprocal demand means a 
difference in the demand as compared to the supply. This is 
the same as saying that it is a difference in the supply as com- 
pared to the demand. When we speak of supply we think of 
marginal cost, just as when we speak of demand we think of 
marginal utility. Exchange may therefore be explained in 
terms of cost as well as in terms of utility; and the law of 
exchange may equally well be stated as the law of comparative 
costs. I may be so much more intelligent than my furnace 
man that I could save much coal by tending the furnace my- 
self; yet I prefer to look after my business, and let him tend 
the furnace, because it pays each of us better to do so. The 
law of comparative costs and of reciprocal demand is the founda- 
tion, not only of international trade as the older economists 
explained, but of all exchanges, that is, of all economic trans- 
actions. 

96. The Rate of Exchange — Barter 

Having ascertained the fundamental condition of exchange, 
let us now turn to the rate of exchange. Suppose that A and 
B both like tea more than salt. A begins by offering ten pounds 
of salt for one of tea, but really wants it so badly that he would 
if necessary go as high as sixty for one. B, on the other hand, 
is willing to give up some tea, but only at the rate of one pound 
of tea for twenty of salt. At the same time he thinks that 
A needs tea for more than he (B) cares for the salt, and there- 
fore begins by saying that he will take not less than seventy 
pounds of salt for one of tea. 

It is plain that an exchange can take place only between 
the limits of twenty and sixty pounds of salt for one of tea. 
At anything under twenty, B will not exchange; at anything 
over sixty, A will not exchange. The lower and higher offers 



228 Market Value [§ 96 

originally made by each are excluded by the desire of each 
to come to terms. Only between the limits of twenty and 
sixty will an exchange be profitable to both. 

The question still remains: what will be the exact rate be- 
tween these limits? In pure theory there must be a point 
between twenty and sixty where the gain of both in surplus 
enjoyment is at a maximum. The location of that point de- 
pends on the comparative desire of each for both commodities. 
If A prefers tea to salt much more than B does, the exchange 
will be made at a figure close to sixty; for even though A 
offers only twenty or thirty for one, his anxiety to get more tea 
will be greater than B's desire to get the salt at that rate, and 
will lead him to increase the offer. With every increase in 
the rate, A's desire for more tea will fall, and B's desire for 
more salt will rise; but as A's original desire is much greater 
than B's, the point at which the relative desires become equal 
must be one comparatively favorable to B, that is, near sixty. 
If, on the other hand, A prefers tea to salt only slightly more 
than B does, the rate will be nearer twenty. Whatever the 
relative preference, there is a point which gives both a total 
maximum benefit. 

This is strictly true, however, only of divisible commodities 
or articles sold in stocks, where any unit possesses a propor- 
tionate value of the whole. Where there is no stock, or where 
the commodity cannot be divided without some loss of value, 
such an exact point between the limits may not be found. 
The relative desires of A and B changed because of the 
minute alterations in the supply of each commodity. But if 
the tea and salt were in ten-pound bags, or if A and B were 
exchanging hens and pigs, the units could not be divided, and 
it might happen that at least one party would get either a little 
more or a little less than he anticipated. 

Even with divisible commodities, however, the theory as- 
sumes that equal knowledge, equal opportunity and equal 
capacity are found on both sides. When these conditions are 



§ 97] One Seller and One Buyer 229 

lacking, as is usually the case in such an isolated transaction, 
the actual rate of exchange will depend largely on the superior 
shrewdness or good fortune of the one party in gauging the 
strength of the other. If A can conceal his intentions better, 
the rate will be favorable to him; if B can ''bluff" better, it 
will be the reverse. The keener and more adroit trader will 
make the greater gain. In practice, therefore, the rate of 
exchange will usually be at almost any point between twenty 
and sixty. 

97. One Seller and One Buyer 

Let us now go a step further and suppose that both parties 
are acquainted with the use of money, and that A has money 
instead of salt, while B is willing to give up his tea for cash 
instead of salt. In other words, A wants to buy tea and B to 
sell it. Instead of barter we now have purchase and sale. 
Substituting a cent of money for a pound of salt, A offers as 
before ten cents (instead of ten pounds of salt) for a pound of 
tea, and B says that he will take not less than seventy cents. 

If the desire of A and B for money is as different as was their 
desire in the preceding case for salt, the problem will be pre- 
cisely the same. This is sometimes true in actual life. A dollar 
is worth more to a poor man than to a rich man, — its marginal 
utility is greater. A physician will charge a wealthy patient for 
an operation far more than a man in modest circumstances. 
The price of an old master or a mediaeval missal will often 
depend largely on the wealth of the purchaser. But in the 
ordinary transactions of life, where we deal in masses of com- 
modities, and where the sum devoted to the purchase is only 
a fraction of the purchaser's wealth, this difference in the worth 
of money may be neglected. Prices on the produce exchanges 
for cotton or wheat are rarely affected by the fact that some 
of the dealers are richer than others. The great advantage 
of the use of money is that in ordinary transactions its mar- 
ginal utility to both parties may be deemed the same. . 



230 Market Value [§ 97 

The problem is therefore simplijEied. The rate of exchange 
was so arbitrary, because as A and B got more or less of salt 
as compared with tea, the marginal utilities of each commod- 
ity varied. But now since A and B desire to buy or to sell 
tea only, and as we assume that the value of money remains 
constant, the price that each is willing to pay depends only on 
their relative demand for tea. In technical language, the 
rate of exchange is, as before, conditioned by the disparity in 
the marginal utilities of the two commodities; but since the 
disparity due to the changes in the utility of money to each 
is now negligible, the total disparity is less than before. If, 
as is possible, this relative demand of A and B for salt in the 
original illustration was responsible for a variation of ten points 
in each case, the limits within which a pound of tea will now 
change hands are reduced from the original figures of twenty 
and sixty (pounds of salt) for one of tea, to thirty and fifty 
(cents) for one pound of tea. That is, if we neglect the varia- 
tions due to difference in the marginal utility of money, the 
price of a pound of tea will be somewhere between thirty and 
fifty cents. Within these limits it will still be arbitrary, where 
A and B are the only buyer and seller. 

The cases thus far discussed are not typical of ordinary busi- 
ness transactions. People no longer barter with each other, 
nor does it often happen that there is only a single buyer and 
a single seller. An example would be the agent of a collector 
of curios meeting a farmer who is persuaded into selling an 
old piece of furniture. Ordinarily, however, there will be 
either a number of buyers or a number of sellers, — and often 
of both buyers and sellers. In such cases we speak of compe- 
tition, because sellers and buyers compete with each other to 
secure the most favorable terms for themselves. When we 
use the term competition we usually mean mutual competition, 
i. e., competition on both sides. In the case of one seller and 
several buyers, we speak of monopoly; we neglect the com- 
petition because it is only one-sided, — between the buyers. 



§ 98] One Seller and Several Buyers 231 

There may also be the reverse kind of one-sided competition, 
as when several sellers deal with only one buyer. This is some- 
times called ''buyer's monopoly," — an expression which is 
clear enough, although etymologically not quite exact, as the 
term monopoly literally implies "one-seller" and not "one- 
buyer." 

98. One Seller and Several Buyers, or One Buyer and 
Several Sellers — Monopoly 

Let us now take the case where several A's desire to pur- 
chase tea from the monopolist tea-dealer. A, as we have seen, 
will not give at the outside more than 50 cents; suppose that 
the limit of A^ is 48 cents, of A^ 45 cents, and of A^ 38 cents. 
If A^ were the only buyer, the price could not rise above s^ 
cents, and might be much below it. But now appears A^, who 
is willing to go as high as 45 cents. If each buyer is ready 
to take B's whole stock, it is plain that competition between 
A^ and A^ will drive the price above 38 cents, whereupon A^ 
will fall out. The rate of exchange can therefore fluctuate 
only between 38 cents and 45 cents. If A^ now steps in and 
is ready to buy the whole stock, A^ will be shut out and the 
price will fluctuate between 45 cents and 48 cents. Finally, 
if A appears, A^ will be excluded and the price will fluctuate 
between 48 cents and 50 cents. In other words, when we 
have competition between the buyers, the rate of exchange 
is limited above by the highest offer made by the buyer to 
whom the rate is most unfavorable (the 50-cent rate of A), 
and below by the highest offer of the buyer next on the scale 
(the 48-cent rate of A^). Thus the arbitrariness of the rate of 
exchange is limited. 

There are two methods by which this result can be reached. 
In an ordinary auction sale, the monopolist seller asks for the 
lowest offer for the whole supply; but even here there is often 
an upset price, that is, a price below which the seller will en- 
tertain no bids at all. That represents the 30-cent linit of B. 



232 Market Value [§98 

With each increase in the bid, some of the would-be buyers 
fall out, until finally A^ stops at 48 cents. At an auction A 
will then get the tea at just about 48 cents; if it were an open 
sale, and if B were not willing to sell at that figure, A might 
go as high as 50 cents. On the other hand, when a municipal 
government offers to sell bonds, each of the would-be purchasers, 
all of whom must submit their bids at the same time in writing, 
naturally offers the highest price at which he thinks he can 
distance his competitors and yet make a profit for himself. 
Here buyers who offer to take the entire issue are often given the 
preference, and each is driven to his maximum limit, not by 
the actual rising bids of his predecessors, but by his fear of their 
competition. This is sometimes called the Dutch-auction sys- 
tem, but it occurs in certain transactions in the United States 
and other countries as well. 

What has been said is equally true, mutatis mutandis, of the 
case of one buyer and several sellers. Suppose that several 
tea-planters, B's, desired to sell their crop to a wholesale mer- 
chant, A, who has in some way monopolized the business of 
supplying the retail dealers. A, as before, will not pay more 
than 50 cents, but B^ is willing to sell at 38 cents. Now comes 
B^, who says he will accept an offer of 34 cents; B^ is evidently 
shut out and the price will fluctuate between 34 and 38 cents. 
If B^ is ready to sell at 31 cents, B^ will be shut out and the 
rate will fluctuate between 34 and 31 cents; if B finally enters 
the market, B^ is excluded, and the limits of sale will be between 
30 and 31 cents. 

Such cases are much rarer than the preceding. For it is 
more difficult in practice to monopolize the demand for an 
article than it is to monopolize the supply. Yet instances 
rill readily occur, as where tenders are invited from several 
persons to supply a definite demand, either of a government 
office for articles like tlothing or armor-plates, or of a private 
individual for the construction of a house or the making of re- 
pairs of any kind. The person inviting the tender is in this 



[§ 98 One Seller and Several Buyers 233 

transaction a monopolist buyer, and each of the rival bidders 
now hastens to make his lowest offer at the very beginning in 
order to forestall his competitor. The contract goes to the 
lowest bidder for the whole amount. 

In what has preceded we have assumed, for the sake of sim- 
plicity, that each of the buyers is ready to take the whole 
amount offered, or vice versa, that each of the sellers is in a 
position to offer the whole amount demanded. Oftentimes, 
however, this is not true. In the ordinary case of monopoly 
sales, competing buyers are usually ready to take only a part 
of the stock. It is instructive to study what the results are 
under such conditions. 

Suppose that the four A's desire different quantities of tea. 
A, let us say, desires 400 lbs. and is willing to pay up to 50 cents 
a pound for the first hundred pounds if he cannot get any 
more, 48 cents for the second hundred, 45 cents for the third 
and 38 cents for the fourth; A^ desires 300 lbs. and is ready to 
pay not more than 48 cents for the first hundred, 45 cents for the 
second and 38 for the third; A^ wishes 200 lbs. and will go to 
45 cents for the first hundred and 38 cents for the second; fi- 
nally, A^ wants 100 lbs. and will give 38 cents a pound. Now, 
if B has only 100 lbs., i. e., if each of the buyers bids for the 
whole stock, we have seen that A will force the price up to 48 
cents, and may even go up to 50 cents. A will thus secure the 
entire supply. If, however, B has more than 100 lbs. to sell, 
some of the buyers (A^) will not bid for the total amount. As 
a consequence both the price and the quantities which each 
purchaser secures will vary. Suppose that B has 300 lbs. A 
and A^ between them will bid the price up to 45 cents in order 
to exclude A^, and the price will vary from 45 cents to 48 cents. 
At any such price A will not get more than 200 lbs., for although 
he is willing to pay up to 48 cents for his second hundred, he 
finds that A^ is ready to pay just as much for what is his first 
hundred; and while A is willing to give up to 45 cents for his 
third hundred, A^ is ready to pay as much for his second hun- 



2 34 Market Value [§ 99 

dred. A cannot escape the competition of A^ except as to loo 
lbs. The result is that the price for the whole 300 lbs. must be 
the same to both, that is, at some point between 45 cents and 
48 cents, and that A will get 200 lbs. and A^ 100 lbs. at that 
price. 

If B has 600 lbs., it can be shown by the same reasoning 
that the price must be between 38 cents and 45 cents, and that 
A will get 300, A\ 200, and A^, 100 lbs. The price cannot 
fall below 38 cents, for otherwise A^ would get some tea, — a 
condition which all the others are interested in preventing, 
as they know that there is not enough to go around. But 
although A^ is shut out, A^ cannot get more than 100 lbs., be- 
cause if there were any danger of His doing so, A^ and A would 
fear to lose some of their share and bid the price up above 
45 cents, which A^ cannot afford. For the same reason A^ 
cannot get more than 200 lbs., for A would then bid the price 
above 45 cents, which A^ cannot afford for his second hundred; 
and, finally, A cannot get more than 300 lbs., for he would have 
to exclude A^ by offering more than 45 cents, which A cannot 
afford for his third hundred. 

Thus in all such cases the rate of exchange will vary between 
38 cents and 50 cents, according to the relative demand of 
each of the buyers. By the same reasoning it might be shown 
that where we have one buyer and several sellers the rate 
would vary from 30 cents to 38 cents. In each case of such 
one-sided competition the arbitrariness of the rate will be 
less than where there is no competition at all. 

99. Several Sellers and Several Buyers — Competition 

We now come to the final case, so generally found in actual 
life, where there are at the same time several buyers and several 
sellers, that is, where there is competition on both sides. They 
all meet, either in person or through agents, on the tea ex- 
change. Each buyer desires to purchase a certain quantity 
of tea, but all the buyers together are ready to take more than 



§ loo] Conclusions 235 

is offered, provided they can get a satisfactory price; each 
seller wishes to dispose of a certain quantity, but all the sellers 
together would be ready to sell more than there is a demand 
for, provided they can get a satisfactory price. In other words, 
each desires to do as much business as he possibly can with 
profit. Under such conditions the market price of the tea must 
be 38 cents, not more and not less. There will be no variation 
at all. 

For if the price fell to 37 cents some of the sellers (repre- 
sented by B^) could not afford to sell, and with the shortage 
in the supply all the buyers together could not get as much as 
they want; they would therefore bid against each other, in the 
fear of not getting enough, and the price would rise. It could, 
however, not go above 38 cents, for if it were driven say to 39 
cents, some of the buyers (those represented by A^) could not 
afford to buy. With the falling off in the demand, each of the 
sellers would fear to be the unlucky one who failed to dispose 
of his stock; the sellers (B's) would therefore vie with each 
other in reducing the price until it fell to 38 cents. 

Thus we see that while in the case of one buyer and one 
seller the rate of exchange is arbitrary (between 30 cents and 
50 cents), in the case of competition on either side the limits 
of variation are reduced (between 30 cents and 38 cents, or 
38 cents and 50 cents respectively), and in the case of com- 
petition on both sides, the limits meet, that is, the arbitrari- 
ness disappears and the rate of exchange is fixed (at 38 cents). 

100. Conclusions 

From the above analysis follow certain important conclusions: 
(i) Under free competition there can be at a given time 
and place only a single price for the same commodity. The 
price of tea must be 38 cents to all; if it were less or more, 
the pressure of the competing buyers or sellers would at once 
operate to bring it back to that point. The exceptions to the 
rule are only seeming. It may happen, for example, that on 



236 Market Value [§ 100 

an exciting day on the stock exchange, when there are violent 
fluctuations in the market, the same securities may be sold at 
the same time in two different groups at different prices. Here, 
however, there is no perfect competition; there are really two 
separate markets, the members of which have no direct con- 
nection with each other. As soon as the excitement dies away 
and the groups of buyers and sellers coalesce, the market be- 
comes a unit, competition is again perfect and the price is the 
same throughout. In the same way a firm may do both a retail 
and a wholesale business, and sell the same article for different 
prices; but plainly there are two separate markets. Again, 
some purchasers have to pay more because their credit is not 
good; but there is no perfect competition, because the buyers 
are really offering different things in exchange. Finally, some 
sellers may ask less because they are ignorant of the market 
conditions, or may grant lower rates to large purchasers be- 
cause the transactions are secret. In no instance where there 
is a perfect competition can there be more than one price for 
the same thing at the same time. 

When competition is absent on one side, that is, in the case of 
monopoly, this principle does not apply. Since the object of 
the monopolist is to make the greatest possible net profits, it is 
to his interest to sell each increment of his supply at the highest 
possible price. If we refer to the example above (p. 231), it 
will always be to the interest of the monopolist tea-dealer who 
has a stock of 300 lbs. to sell 100 lbs. to A at a price over 48 
cents, and the other 200 lbs. to A and A^ at a price between 
45 cents and 48 cents, rather than to sell the 300 lbs. at the 
lower price. The monopohst will not generally be able to do 
this, for he may be selhng in a market where he must seek to 
dispose of his whole stock without perfect knowledge as to 
the conditions of the consumers. Wherever he can, however, 
he will make different prices to different persons, and if possible 
will even sell different increments of the supply at different 
prices to the same person. Thus not only does the Standard 



§ lool Conclusions 237 

Oil Company find it profitable to charge different prices for 
its oil, but the makers of particular brands of soap or choco- 
late, which give them to that extent a monopoly, are in the 
habit of putting the same soap or chocolate into different pack- 
ages and selling them at different prices, in the expectation 
that different grades of purchasers will be attracted. Under 
competition this would be impossible. 

(2) In the case of competition the market price is always 
the one at which the greatest number of exchanges can be 
effected. If the price fell below 38 cents, some of the sellers 
could not dispose of their tea; if the price rose above 38 cents, 
some of the buyers would be unable to secure tea. In either 
case some would go unsatisfied. When the determination of 
the market price is left to a superior authority, as on the Berlin 
stock exchange, we have a good illustration of the principle. 
There the bids and offers, in writing, are so adjusted by a com- 
mittee that although no one pays more or receives less than he 
intended, some may pay less or receive a higher price for such 
quantities as are needed to balance the transaction, with the 
result that some bids or offers which would otherwise have 
been excluded are finally accepted. 

In the case of monopoly the principle does not apply. Since 
the monopolist controls the supply, he may secure a greater 
net return by selling a smaller quantity at higher prices rather 
than a larger quantity at lower prices. The exact point at 
which he can sell the largest quantity at the greatest profit 
depends on the rapidity with which the scale of demand in- 
creases as the supply falls off. If the monopolist is in posses- 
sion of 600 lbs. of tea, the entire stock in the market, whether 
he sells 600 lbs. for 50 cents or 500 lbs. for 60 cents, will be 
immaterial to him. But if he finds that by his offering only 
500 lbs. the price will rise to 65 cents, he will naturally offer 
only this quantity, and destroy the other 100 lbs. In the case 
of competition he would not dare to do this, because his com- 
petitors would continue to supply the market at approximately 



238 Market Value [§ 100 

the old price; and he would be compelled to accept this price 
for his reduced quantity. Had the Dutch East India Com- 
pany not possessed a monopoly, it would not have destroyed 
a part of its stock of spices in order to secure greater 
profits from the sale of what remained. When some of the 
misguided Alabama planters burned a part of the cotton crop 
in 1904 in order to raise the price of the remainder, it was on 
the assumption that every other planter would burn his 
proportionate share, — an assumption as rash as it proved to 
be unfounded. 

(3) If by demand price we denote the price offered by the 
buyers, and by supply price the price asked by the sellers, the 
marginal demand price is the lowest, as the marginal supply 
price is the highest, price that is actually accepted. The mar- 
ket price must always be the price where the marginal demand 
and marginal supply prices meet. The market price is there- 
fore in cases of competition always the marginal price. In 
the example given above, the marginal purchaser is A^; the 
marginal seller is B^. A^'s marginal offer to purchase, i. e., 
his demand price, is 38 cents; B^'s marginal offer to sell, i. e., 
his supply price, is 38 cents. If A^ was originally willing to 
go as high as 39 cents, while B^ was ready to sell at 38 cents, 
these would not be final marginal figures; for either there 
would be an A^ not willing to go quite so high and a B^ de- 
manding a little higher price; or A^ would not give as much 
as 39 cents for a further increment, and B^ would not be 
willing to let a further increment go for as little as 38 cents. 
There would inevitably be some point between 38 cents and 
39 cents where the mutual competition of the A's and B's 
would meet, and which would mark the marginal offers of A^ 
and B^ respectively. 

The difference between the actual market price and the non- 
marginal offers represents the surplus. In the case of the sellers 
who get the money, the surplus is called a profit;, in the case 
of the buyers who get the tea, the surplus is a consumer's sur- 



§ loo] Conclusions 239 

plus if they drink the tea, or a profit if they sell the tea. B^, 
who sells the tea for 38 cents, makes no profit. His offer to 
sell for 38 cents is the marginal offer, because at that point he 
ceases to have any inducement to exchange. But B^ would 
have been willing to take 34 cents, and therefore makes 4 cents 
a pound profit; B\ whose limit was 31 cents, gains 7 cents; 
and B with a limit of 30 cents gains 8 cents. On the other 
hand. A, who buys the tea for 38 cents, would have been willing 
to go to 50 cents. If he drinks the tea, this difference of 12 
cents represents a surplus satisfaction to him; if he was willing 
to give 50 cents because he knew he could sell it for that, the 
12 cents represent his profit. A^, whose limit was 48 cents, 
secures 10 cents surplus, A^ with a limit of 45 cents gets 7 
cents surplus, while A^, whose limit, s^ cents, is equal to the 
price, enjoys no surplus at all. 

The marginal buyers and sellers (those who fix the price) 
thus neither make nor lose; there will be nobody beyond the 
margin because he would lose; while all those within the mar- 
gin — the intramarginal buyers and sellers — make a gain, 
measured either in money or in enjoyment. The gain — whether 
profit or consumer's surplus — has, however, no effect on the 
price. 

In the case of monopoly there is generally no marginal price, 
because there is only one seller or one buyer respectively. In 
the ordinary case of one seller there are indeed many buyers, 
one of whom makes a marginal offer or demand price, while 
the intramarginal buyers gain. But as the seller has control 
of the supply, there is only one supply price, — no higher or 
lower supply prices, and therefore no marginal supply price. 
It is barely conceivable that the relative state of demand and 
supply is such that the seller is compelled, in order to dispose 
of anything at all, to reduce his price to a figure so low that 
even the least anxious purchaser can get what he wants at his 
own valuation. In such a case the monopolist makes no gain; 
his supply price would be the marginal demand price. But, 



240 Market Value [§ 100 

except in this almost impossible case, the monopolist will be able 
to charge more, and the market price will not be the marginal 
price. Market price is always the price at which the demand 
price and the supply price meet each other; in all but the most 
exceptional cases monopoly market price is not a marginal 
price. 



CHAPTER XVI 
DETERMINATION OF NORMAL VALUE 

101. References 

N. G. Pierson, Principles (1902), part i, chs. i, vii; A. Marshall, Prin- 
ciples (1910), bk. iv, ch. iii, and bk. v. chs. iv-vii; E. v. Bohm-Bawerk, 
Positive Theory (1891), bk. iv, ch. vii, and Karl Marx and the Close of his 
System (trans, by MacDonald, 1898); J. B. Clark, Essentials of Economic 
Theory (1907), ch. vii; F. v, Wieser, Natural Value (1893), bk. v; M. 
Pantaleoni, Pure Economics (1898), part 2, ch. iii; J. S. Nicholson, Prin- 
ciples (1901), bk. iii, ch. v; J. E. Cairnes, Leading Principles (1874), part 
I, ch. iii; T. N. Carver, Distribution (1904), ch. ii; F. A. Fetter, Principles 
(1915), ch. vii; A. W. Flux, Principles (1904), chs. iv, v; A. T. Hadley, 
Economics (1896), ch. iii; H. Sidgwick, Principles (1883), bk. ii, ch. ii; F. 
W. TdiV&svg, Principles (191 1), chs. xii-xvi; H. G. Kittredge, Utilization 
of Wastes andBy-Products in Twelfth Census, X., 725-748; A. C. Whitaker, 
History and Criticism of the Labor Theory of Value in English Political 
Economy (1904). 

102. Normal Demand — Elasticity of Demand 

In the discussion of market value we studied the process by 
which the temporary demand and supply balance each other. 
In the discussion of normal value we must consider the influ- 
ences which affect the more permanent demand and supply. 
In our example it was assumed that the temporary demand 
and supply were such that tea sold for 38 cents. The question 
now arises, why did tea sell for 38 cents rather than for 3 cents? 
The study of normal value is the study of normal demand 
and of normal supply. 

Since the demand for a commodity means the quantity 

desired at a given price, a change in the demand may take 

place without being caused by any change in the price. When 

ostrich feathers went out of fashion a few years ago, the de- 

16 241 



242 Normal Value [§ 102 

.mand fell off to such an extent that prices went down and pro- 
duction was curtailed. The supply adjusted itself to the smaller 
demand at the lower price. The change in demand was, in last 
analysis, the cause of the change in price. 

Ordinarily, however, demand is affected by the price. We 
speak of demand being elastic when a change of price pro- 
duces a marked alteration of demand, demand falling or ris- 
ing as the price goes up or down. Every commodity has its 
own law of demand. There are as many degrees of elasticity 
of demand as there are variations in human wants and the ability 
of men to satisfy these wants. Demand may be relatively 

' inelastic or stiff, either in the sense of being constant or in the 
sense that it will be completely destroyed by any increase of 
price. ■ 

(i) The best example of inelastic demand in the first sense 
is salt. A fall in price will not induce us to eat more; an in- 

■ crease of price will result in almost no falling off in demand. 
Nevertheless the demand is not completely inelastic, because 
if the price rises enough the poor may be compelled to curtail 
its use, even if it involves disease and decimation. Somewhat 
analogous in this respect to necessities are high-priced luxu- 
ries. The purchasers of pearls are not quite so likely to be 
held back* by a moderate increase of price as would be the 
less well-to-do consumers of cheaper commodities. Yet the 
demand for pearls is relatively inelastic only at one end of 
the scale; even a shght decrease of price might augment the 
demand considerably. 

(2) The other case of inelastic demand may be illustrated 
by oleomargarine. If the price were to rise beyond a certain 
point, the demand would be completely destroyed, and it would 
be replaced by butter. Even here, however, the demand 
is inelastic only beyond that limit; within it, a decrease of 
price means an increase of demand. With well-nigh every 
commodity the demand will be annihilated if the price is forced 
high enough. 



§ I02] Elasticity of Demand 243 

The proper statement, then, is not that demand is quite 
inelastic, but that every commodity has its own relative degree 
of elasticity of demand. The demand for some things is far 
more expansible than for others; a fall in the price of cotton 
will mean a greater increase in demand than a proportionate 
fall in the price of books. 

While utility lies at the foundation of value, some commod- 
ities can be utilized only in combination with others. A bow 
is of no use without an arrow; a pen is worthless without ink. 
The demand for such complementary goods is a composite or 
joint demand: we want the pen and the ink together, we want 
neither of them separately; but when we know that we can 
get the one, we want the other; The demand for either of 
two complementary goods is thus an indirect or derived de- 
mand, and the elasticity of a derived demand often differs 
from that of a direct demand. 

If the price of both complementary goods rises, the demand 
for each will normally fall. But if the price of only one of the 
complementary goods rises, the demand for it will not fall to 
the same extent. If both ink and pens rise in price, more 
people will use pencils. But if the price of ink remains the 
same, the price of pens must rise far higher before the pur- 
chaser will be driven to accept a substitute. The demand for 
one of two complementary goods is more inelastic than the 
demand for a commodity which possesses independent utility. 
Direct demand is more elastic than the derived demand which 
flows from the existence of joint demand. 

In modern life the sphere of joint demand is continually 
growing. Production is becoming more complex, and the 
demand for most goods used in production depends more and 
more on the possibility of combining them with others. Con- 
sider the numberless things that go to make up a steamship. 
Some of them possess a direct utility for other purposes; but 
to the extent that their value largely depends on the demand 
of shipbuilders, most of them may be considered complemen- 



244 Normal Value [§ 103 

tary goods. The more complex our productive processes and 
the more refined our methods of consumption, the greater is the 
sphere of joint demand. The more striking also are the effects 
which changes in demand for one commodity produce on the 
demand for others. The demand for bicycles affected the 
demand for horses; the introduction of the railway revolu- 
tionized the demand for coaches and for country inns. The 
demand for any commodity is in one sense dependent upon, 
or derived from, the demand for other commodities. 
' Whatever the nature of the demand, however, whether direct 
or complementary, whether stiff or inelastic, as long as there is 
any permanent demand at all, there will be an effort on the part 
of society to fill the demand. Inasmuch as all value depends on 
the relations between demand and supply, it becomes necessary 
to study the forces which influence the permanent supply. 

103. Normal Supply— Cost of Production 

We have learned above (§89), that valuable things may 
be divided into four classes, namely, human services, con- 
crete commodities, relations and privileges, and a fund of capital 
in general. It must be noted, furthermore, that economic 
goods are also divisible into goods of which the supply cannot 
be increased, like favored sites of land, waterfalls, old pictures 
and coins, or unique examples of anything; and, secondly, 
into reproducible goods. 

The discussion of market value and the preceding remarks 
on normal demand apply to all the above classes. In treating 
of normal supply, however, it is advisable to study first those 
concrete things which can be duplicated. The great mass of 
commodities can be increased in quantity, and the progress of 
society depends ultimately on this increase. We shall there- 
fore restrict the discussion in this chapter to those reprodu- 
cible commodities, and reserve for the next chapter the study 
not only of those concrete goods whose quantity is fixed, but 
also of the other embodiments of value. 



§ 103] Cost of Production 245 

Sometimes a commodity is picked up by chance, as when 
we stumble across a gem or an unexpected deposit of gold. 
Clearly, however, we cannot depend on such accidental finds 
for a permanent supply; as soon as we search for them we are 
purposely spending time and labor on their acquisition. Since 
therefore all goods whose quantity is susceptible of increase 
are acquired (or, in technical language, produced) by efforts, 
they cost something to produce. In a society which uses 
money this subjective pain cost is translated into a money 
cost, or what is ordinarily called the expenses of production. 
Hence it is usually stated that the normal supply price of 
commodities — that is, the price at which producers in the 
long run are wilHng to sell their supply — depends on cost of 
production. 

In making this statement, however, we must be careful to 
define both branches of the term cost of production. By pro- 
duction we do not mean particular production; by cost we 
do not mean individual cost. 

(i) Cost of production does not necessarily mean the cost 
Cif producing the particular commodity in question. The labor 
expended on a commodity has no necessary influence on its 
p)rice. A yard of cotton cloth may have cost twenty cents to 
produce; if through some new invention the same cloth can 
now be produced for ten cents, the price of the old supply wiU 
no longer be twenty cents. It is evident, then, that when we 
speak of cost of production we mean the cost of continuous 
production or cost of reproduction. If cotton cloth can be 
duplicated or continuously produced (i. e., reproduced) for ten 
cents a yard, the supply price will remain ten cents. It is 
only where the cost is a constant cost, that is, where cost of pro- 
duction is equivalent to cost of continuous production or re- 
production, that the supply price depends on the cost of 
production. When cost of production and cost of reproduction 
diverge, it is only the latter that affects value. 

(2) Secondly, cost of production does not mean individual 



246 Normal Value [§ 103 

cost. Value, as we know, is a social conception; the real cost 
of production which affects value is the socially necessary cost. 
The important point is not that a commodity costs the producer 
something, but that it saves the consumer something. It may 
save one consumer more than another, but its value depends 
on what it saves the social group as a whole. This saving of 
social cost is what is meant by socially necessary cost. I may 
spend much time on something which will have no sale because 
it does not suit the social demand. The commodity will then 
of course not be duplicated; there will be no cost of repro- 
duction. The markets are full of such examples of misdirected 
labor, which involve the producer in loss. A new shirting, for 
instance, fails to strike the popular fancy; a new brand of 
tobacco attracts no notice. If, on the other hand, the product 
fills a social demand, the producers will adjust their output 
and their exertions to this demand. The cost to the individual 
producer will adjust itself to the socially necessary cost, that 
is, the amount which the purchasers as a group are willing to 
give rather than make the article themselves. If the indi- 
viduals cannot reduce their cost, they will stop producing; if 
they reduce their cost below this point, the point itself will 
move. Society will not be wilHng to give more, because what 
the producers can do, the rest of society can, if necessary, do. 
It is in this way that an equivalence is brought about between 
individual and social cost; and it is only because of this equiv- 
alence that cost of production may be said to influence value. 

When therefore we affirm that the normal supply price 
depends on cost of production, we must remember that we 
are speaking only of reproducible goods, and that the state- 
ment is true only in the sense, first, that production means re- 
production, and, secondly, that cost means socially necessary 
cost, — not pains (or their money equivalent) taken, but pains 
saved. When individual and social cost diverge, value does 
not depend on individual cost of production; when they meet, 
value may be expressed in terms of either. It is only because 



§ I04] Law of Marginal Cost 247 

individual cost tends to, adjust itself to the socially necessary- 
cost that we can roughly speak of the price of anything de- 
pending on its cost of production. 

104. LaTv of Marginal or Maximum Cost 

The term cost of production must be further defined. When- 
ever there is more • than one producer, there will be different 
costs of production. Producers differ in ability or in oppor- 
tunity. While all similar units in the supply sell under com- 
petitive conditions at the same price, the superior skill of some 
employers or the more fortuitous combination of other causes 
enables some to produce more cheaply than others. If the 
cheaper producer could supply the whole market, he would 
secure a monopoly. But while all producers seek to sell as 
much as they can, it only rarely happens that any one can 
furnish the entire supply. Whenever there is competition, there 
are different costs of production. 

It may conceivably happen, indeed, that all the producers 
at a particular moment are men of precisely the same abilities 
and subject to the same conditions. In this possible case — 
which is apt to be true only of newly started industries — there 
would indeed be only one identical cost for all units of the supply. 
There could then, however, not be any permanent profits to 
aU the producers, because prices could not permanently re- 
main above the mere cost of production. If there were profits 
to all the producers, competition would surely induce one of them 
to lower the price in the hope of securing larger profits through 
greater sales; or if he did not do this, some new producer would 
enter the field and cut prices. The only way in which prices 
could be permanently kept at the old level would be through 
some control of the supply. We should, however, then no 
longer have free competition, but should be in the presence 
of some form of monopoly. Permanent production at the same 
cost for all units of the supply almost always involves some 
form of monopoly. 



248 Normal Value [§ 104 

Since, therefore, there is in case of competition no uniform 
cost, the question arises, when we speak of prices depending on 
cost of production, which cost? It can manifestly not be the 
lowest cost.. If at any moment there are five firms supplying 
the entire market for cotton goods, at a cost to each of six 
seven, eight, nine and ten cents a yard respectively, it is clear 
that the price will not be six cents, for all except the six-cent 
producer would then lose money and stop. Nor can the price 
be fixed by the average cost of production, as is often carelessly 
stated. For if the price were the average cost, that is, eight 
cents, the nine and ten cent producers would lose and withdraw 
their capital. As long as the demand is large enough to keep 
all the producers in business, the price must be ten cents, — 
corresponding to the greatest or maximum cost. It cannot be 
lower than ten cents, for otherwise the ten-cent producer would 
step out; it cannot be higher than ten cents, because in their 
mutual endeavor to capture more of the market the price will 
be kept down to the lowest point consistent with continuous 
production. 

This maximum cost may also be called the marginal cost of 
production, because the ten-cent producer is just on the margin 
of withdrawing. He neither makes nor loses. All the other 
producers — the intramarginal producers — earn a profit rep- 
resented by the difference between the cost to them and the 
selling price. The six-cent producer makes four cents on each 
yard, the seven-cent producer three cents, and so on. But the 
ten-cent producer only covers expenses. 

If we could conceive of society at a given moment, with no 
changes in population or fashion or supply of capital or tech- 
nique, this condition would be permanent. The marginal 
producer would just barely make both ends meet, but would 
earn nothing above his cost. Bu^t although society is never 
permanently in such a state, the condition may at any given 
period be said to be realized. At every season when goods 
are thrown on the market the seasonal supply may be deemed 



§ 105] Law of Minimum Cost 249 

fixed. The cotton prints that are sold this year were made 
months ago. According to variations of demand from day to 
day the market price will change, but the oscillations during 
this particular season will move about a central point of normal 
price which, so far as the supply for this season is concerned, 
depends upon the maximum cost, that is, the cost of producing 
the most expensive increment in the actual supply. Whatever 
the daily fluctuations of market price may be, the normal price 
for this season will be ten cents a yard. At any given period, 
cost of production means maximum or most expensive cost. 

105. Law of Minimum Cost 

The normal supply price just discussed is, however, not the 
permanent price for longer periods. Actual business condi- 
tions are dynamic. There is a continual movement going on 
in the forces that affect supply. The cotton prints may sell 
one season at ten cents, but next season the more efficient 
producer, or perhaps some new-comer with more capital or with 
better machines or with the chance of securing cheaper labor 
or with improved facilities for marketing the product, will 
endeavor to put out an increased supply at a lower cost. This 
increase of supply will tend to depress the price, and although 
the manufacturer's percentage of profit may be smaller than it 
would have been at the old price, his aggregate profits will be 
enhanced through the greater volume of sales. 

On the other hand, his gains will be at the expense of the 
less efficient producer at the margin. In every business there 
are always some who are able just to make both ends meet. 
Their machinery is antiquated, their capital has been depleted, 
their business activity and knowledge are no longer what they 
should be, and their former profits, if there ever were any, have 
now vanished. They may continue for a time to struggle 
along, hoping against hope, and may live on their capital, being 
content to bridge over the next few years without profit; or if 
they have invested heavily in unsalable buildings and machin- 



250 



Normal Value 



[§ 105 



ery, they may deceive themselves by a fallacious system of 
bookkeeping, and through a neglect to charge up the item 
of depreciation of stock or machinery, may figure out a nomi- 
nal profit. In any case, however, the day of reckoning is sure 
to come. Sooner or later the producer will find that he is not 
making money. He will cease producing that particular com- 
modity, and his place will be taken by some more efficient 
producer. 

All industrial progress consists of a perpetual change at the 
top and at the bottom of the line of producers. Fresh capital 
is continually coming in, the discouraged are continually step- 
ping out. 

It is plain, then, that if by normal value we mean the value 
to which prices tend in the long run to conform, normal value 
under conditions of progress moves in the direction of cost of 
production under the most favorable, not under the least favor- 
able, conditions. It tends toward lowest cost, not highest cost. 
In the cotton industry, for instance, a new man enters the field 
who can produce prints somewhat more cheaply. While not 
able to supply the entire market, he can turn out such large 
quantities that the price will fall, let us say, to nine cents. He 
is willing to sell at that figure, because he expects to dispose 
not only of his share of the greater sales due to lower prices, 
but also of a proportion of the goods previously sold by the 
ten-cent producer, who now drops out. Even if he could sup- 
ply the whole demand, he will not reduce the price to eight 
cents, because, although this would again increase his sales, 
his competitors — the six- and seven-cent producers — will 
also sell more, and he will not be able to sell enough more to 
compensate him for the lower price. Under such conditions 
the price will be nine cents, and, the ten-cent producer having 
fallen out, the nine-cent producer becomes the marginal man. 

On the other hand, if the new producer finds that he can 
produce his goods at a lower price and market them more 
successfully than his competitors, the price will gradually fall. 



§ io6] Law of Varying Cost 251 

With every decrease in price the old marginal producer dis- 
appears, and he who formerly made a profit now becomes the 
marginal producer. When a five-cent or a four-cent producer 
makes his appearance, the price may fall to six cents, and the 
nine-cent, eight-cent and seven-cent producers successively 
abandon the struggle, until the six-cent producer now becomes 
the marginal producer. 

Thus it is that while the cost of production on which sea- 
sonal or short-time normal supply price depends is greatest 
or maximum cost, the cost of production which influences 
permanent normal value is lowest or minimum cost. In con- 
ditions of change the marginal or maximum cost does not fix 
the price, but is fixed by the price; the price does not fall to 
nine cents because the nine-cent man becomes the marginal 
producer, but the nine-cent man becomes the marginal pro- 
ducer because the price falls to nine cents. Hence, while 
normal value is at any given moment at the point of maximum 
cost, it is under conditions of progress continually moving in 
the direction of minimum cost. 

106. Elasticity of Supply — The Law of Varying Cost 

Corresponding to the elasticity of demand, there is an elas- 
ticity of supply. In some cases where no additional quantity 
can be secured on any terms the supply may be said to be 
completely inelastic. But in most cases the supply is suscep- 
tible of increase. According to the difficulties involved in 
procuring this new supply we speak of the relative elasticity 
of the supply. When an additional amount of exertion will 
result in a proportionate increase of output, that is, when double 
the labor will double the supply, we speak of the cost being 
constant. 

Constant cost, then, is not the same as uniform cost. When 
we say that a commodity is produced at uniform cost, we 
mean that all parts of the supply produced at a given time cost 
the same. This implies that there is only one producer. For, 



252 Normal Value [§ 106 

as we have seen, as soon as there are different producers we 
have a maximum and a minimum cost. Uniform cost impHes 
monopoly. On the other hand, when we say that a commod- 
ity is produced at constant cost, we mean that additional quan- 
tities will cost the same. This applies to competition and to 
monopoly alike. If it costs the monopolist ten cents to pro- 
duce every yard of cotton, no matter how large the output, 
the cost is both uniform and constant. If the ten-cent producer 
competes with the six and eight cent producers, and if each can 
double his output by the application of double the amount of 
capital, the cost is not uniform, but it is constant. 

In many cases the cost of production is not constant, be- 
cause the supply is less expansible or elastic. When each 
additional increment of the supply costs more than the pre- 
ceding, we speak of increasing cost or, since the returns from 
each additional application of energy grow smaller, we can 
equally well speak of diminishing returns. 

In one sense everything, as we know (§ 88), is subject to the 
law of diminishing returns. While, however, the law of dimin- 
ishing returns or increasing cost is universal in the sense that 
it applies to all economic goods after a certain point, it does 
not necessarily apply before that point has been reached. The 
''certain point" is the point of full utilization. It frequently 
happens that this point has not been reached. If we recur to 
the examples on page 213, the omnibus may run only half full; 
there may be only two trains a day when there might equally 
well be a dozen; a farmer with a twenty-five-acre tract may 
have a family so large that he would more than double his 
produce if he had a fifty-acre farm. In the case of the omnibus 
an increase of business will not increase the expense at all; in 
the case of the railroad more rolling stock and employees may 
be needed, but new bridges, new roadbed, new stations and new 
general ofiices may not be required; in the case of the farmer 
more seed and perhaps more implements will be used, but these 
may constitute only a minor element of cost. In all these 



§ loyj Law of Joint Cost 253 

cases a doubling of receipts may not be attended by a doubling 
of expense; the expenses will increase, but not so fast as the 
income. 

Whenever the supply is more elastic, that is, whenever double 
the amount of exertion yields more than double the output, 
we are in the presence of the law of increasing returns or de- 
creasing cost. When double the exertion just doubles the 
output, we have the law of constant returns or constant cost. 
Up to the point of full utilization the returns may at first grow 
faster than the cost or exertion, and may then keep pace with 
it. In every business enterprise some expenses grow with every 
increase of business, but others remain the same up to a given 
point. Such expenses are called constant as opposed to varia- 
ble expenses. Whenever the investment of capital is consider- 
able, the proportion of constant to variable expenses is apt for 
a time to be large. But the time will ultimately expire. When 
the railroad traffic becomes very dense, new tracks, heavier 
bridges, larger stations must be provided, and the law of in- 
creasing returns loses its efficacy. Sooner or later the law of 
increasing returns will be supplanted by that of constant re- 
turns, only itself finally to give way to the fundamental law of 
diminishing returns. 

At any given period, however, an industry may be subject 
to any one of the three laws. The question whether a business 
follows the law of diminishing, constant or increasing cost is a 
question of fact depending upon the possibility of profitably 
employing more labor or capital, that is, of successfully extend- 
ing the point of intensive or extensive utilization. 

107. Law of Joint Cost 

Just as we have seen that there is a joint demand, so there 
is a joint supply. To the extent that supply depends on cost, 
we have the law of joint cost. In many cases different parts 
of the same commodity serve different uses and therefore sell 
at different prices: the staterooms in a steamer, the seats in a 



2 54 Normal Value " [§ 107 

theatre, the various portions of an animal used for food, appeal 
to different classes, and thus sell at varying prices. The nor- 
mal price does not adjust itself to the cost of the particular 
part, because there is no such separate cost. It is the whole, 
not the parts, to which we can assign a cost; and this cost is 
the joint cost. The normal price of all the parts together 
adjusts itself to the joint cost, but the price of any particular 
part may be above or below this level. 

A more important class of cases is represented by industries 
devoted primarily to the production of some one commodity, 
but which have as an incidental result the creation of a by- 
product. Sometimes this by-product is only the refuse, as 
in the case of the mash sold by the whisky distillers or the 
coke sold by the gas companies. Occasionally the by-product 
even develops into the chief product. The refuse of to-day 
becomes the principal source of profit of to-morrow. There is 
nothing more fascinating in the annals of science or more im- 
portant in the progress of wealth than the story of the modern 
utihzation of wastes and by-products. This story, in its appH- 
cation to the United States during the decade 1890-1900, has 
been told by Mr. Kittredge in the twelfth census. 

Whenever a business produces more than one kind of com- 
modity, we have something analogous to by-products. One of 
the greatest difficulties in modern enterprise is for the pro- 
ducer to assign to each unit or class of his output its propor- 
tionate share in the joint cost. In the case of railway charges 
this difficulty is at its maximum. In such cases the price of 
the individual product may bear little relation to its own cost, 
although the price of all the products together is fixed by joint 
cost. The railway charges more for the transport of a given 
value of silk than for that of an equal value of coal, although 
the cost is far less. Price here is fixed not by cost of produc- 
tion or cost of service, but by value of service. The silk is so 
much more expensive than coal that it can afford to pay a 
higher charge. If the same price were charged for coal as for 



§ io8] Normal Demand and Supply 255 

silk, coal could not be transported at all, as the price would 
be prohibitive; and as long as the charge for coal is higher 
than the mere hauling expenses, the charge for silk is lower 
than it would otherwise be (see § 237). The principle of value 
of service is only another way of stating the law of marginal 
utility, and it shows clearly that cost of production in itself 
is not the ultimate regulator of value. In the same way, when 
domestic manufacturers regularly dispose of a portion of their 
surplus output by "dumping" it abroad at prices far lower 
than at home, it does not always follow that the lower foreign 
prices make the domestic price exorbitant. For the continu- 
ous foreign sales at the lower price may be the chief means of 
keeping the factory going, and may thus make the domestic price 
lower than it would be if the producer had to charge up to 
his domestic goods the total expenses of a production which 
would otherwise be unremunerative. Cost of production is 
coming more and more to mean joint cost; the price of a given 
product may bear only a remote relation to its individual cost 
of production. 

108. Equilibrium of Normal Dem.and and Normal 

Supply 

In the preceding sections we have several times spoken of 
normal value depending on cost of production. In reality it 
is only normal supply price that is directly related to cost of 
production, while normal demand price depends on the strength 
of the effective demand. It remains, then, to consider the 
mutual influence of normal demand and normal supply. 

While the existence of a demand is the fundamental cause 
of value, the influence of supply shows itself in the fact that 
the tendency of normal value is to adjust itself to the cost of 
production, as we have explained the term. A change in the-^ 
normal demand for reproducible goods means a change in the 
normal supply; but whether it means a change in normal 
value depends on the law of cost. If the demand for a com- 



256 Normal Value [§ 109 

modity increases greatly, the permanent output will be larger. 
If the industry is subject to the law of constant return, the price 
will not change, because the larger supply and the larger de- 
mand will still balance each other at the old price. But if the 
industry is subject to the law of increasing return, where a larger 
output involves a relatively smaller cost, the result will be that 
the producers will be able to throw on the market more than 
is needed, and the influence of this augmented supply will 
reduce the price, until there is now a new and permanent equi- 
librium of demand and supply at the lower price. 

Since diminution of cost of production is attended by lower 
prices and larger output, the influence which seems to affect 
normal value is the change in cost of production. 

In truth, however, demand is a factor of at least equal im- 
portance in fixing normal as well as market value. Unless the 
producers can dispose of their enlarged output, they will 
have no inducement to continue. If the demand cannot be 
changed, the price cannot. But if the demand can be stim- 
lated by the lower price, the supply will be increased until 
there is a permanent supply at a fixed cost to satisfy the per- 
manent demand. If the supply changes owing to an altera- 
tion in cost, there can be a permanent supply at this new cost 
only if there is a new permanent demand. In every case 
there can be a normal price only if there is an equilibrium 
between the normal demand and the normal supply. So 
that when we say that normal price is fixed by the cost of 
production, we really mean that it is fixed at the cost of pro- 
duction. Only in this sense can we speak of normal value de- 
pending at any given moment on maximum cost, or tending in 
the long run toward minimum cost, or being influenced in parti- 
cular cases by joint cost. 

109. Influence of Normal Price upon Market Price 

It is therefore inexact to say that market price depends on 
demand and supply, while normal price depends on cost of 



i 



§ I09] Normal and Market Price 257 

production, if we mean by this that the two statements are 
opposites. All price .depends on demand and supply, but in 
the case of reproducible goods the permanent equilibrium 
between demand and supply tends to adjust itself to the 
cost of production. The rapidity with which this adjust- 
ment takes place depends on the relative changes that oc- 
cur in demand and supply. If the stock of cotton prints 
produced at a cost of twenty cents a yard is large, and if the 
introduction of the newer ten-cent prints of the same quality 
is slow, the price will not at once fall to ten cents. There 
will be a tendency for the price to adjust itself to the new 
cost, and the greater the relative supply of the new cloth, the 
more quickly will the price fall. As soon as purchasers know 
that they can get the same goods cheaper by waiting a short 
time, only those who cannot afford to wait will be willing to 
pay more; and it is their demand which for the time prevents 
the subsidence of the price to the new cost level. When 
the new level is reached no further change takes place, the 
conditions will be static and the normal price permanent. 

If, on the other hand, the cost of cloth continuously falls 
owing to the introduction of successive improvements, the 
normal price will itself be changing. The market price will 
move in the direction of the new cost or normal price, but the 
fall in cost may be so rapid, and the influence of the old 
stocks so great, that the actual market price may not at any 
moment quite reach the normal price. There will be a per- 
petual chase, but no reaching of the goal of equivalence 
between the market and the normal price. There will be no 
permanent equilibrium, because there will be a continual 
change in the forces affecting the supply and the demand. 
Under dynamic conditions the normal price of commodi- 
ties may never emerge, but its influence is none the less 
marked. 



17 



258 Normal Value [§ no 

110. Normal Monopoly .Value 

The foregoing discussion has proceeded on the assumption 
of competitive conditions. If by monopoly we mean the usual 
case of sellers' monopoly, the difference between monopoly 
and competition lies entirely on the side of supply. Unless 
there is a change in price, permanent demand will not ordi- 
narily change simply because competitors are supplanted by 
a monopolist. But the conditions affecting permanent supply 
are at once altered by such a transition. 

In the first place, monopoly supply price is not necessarily 
a unitary or single price. The monopolist may make great 
profits by selling different parts of the supply of the same 
commodity at different prices. The principle here, however, 
is precisely the same as in the case of monopoly market price, 
which has been mentioned above (p. 239). There may not 
be one normal price, but several. 

Secondly, marginal cost has no influence on price. It may 
indeed happen that the monopolist controls several factories 
which work under different advantages so that technically there 
may be differences in their expense of production. The point, 
however, is that no force exists tending to fix the price at the 
point of greatest cost. One cotton factory in the trust may 
produce prints at five cents, another at ten; in the absence of 
competition there is no reason why the trust should sell all the 
goods at ten cents. 

If monopoly price is not influenced by marginal cost, is it 
affected by cost at all? Assuredly, but in a more indirect 
way than competitive price. Monopoly price is always at 
the point of maximum monopoly revenue. The monopolist, 
like every one else, wants to sell the greatest amount at the 
highest price; the monopolist, however, controls the supply. 
Since increased supply ordinarily means lower price, he will 
experiment until he finds the point of greatest net returns. 
The influence of demand over which he has no control is as 



§ no] Normal Monopoly Value 



259 



potent as in competition; the law of substitution works here 
as there. If by reducing prices one-half he doubles his sales, 
the gross receipts will be the same as before; if he cannot 
double his sales, the gross receipts will fall off; if he more 
than doubles them, his gross receipts will increase. Thus the 
elasticity of demand is of paramount importance. 

Since the supply, however, costs something to produce, his 
net profits will depend on the surplus of gross receipts over 
cost. This surplus will vary not only with the elasticity of de- 
mand, but also with the elasticity of supply. In other words, 
if the industry is subject to the law of constant cost, the 
maximum monopoly revenue will be reached at an easily ascer- 
tained price. If he charges less, he would sell more, but not 
enough more, to compensate him at the lower price for the 
total cost of the increased output; his gross receipts would not 
rise as fast as his aggregate cost. On the other hand, if he 
charged more, the sales would fall off so quickly that the 
decrease in his gross receipts would not be offset by the lower 
aggregate cost of the entire output. 

If, however, the industry is subject to the law of increasing 
cost (diminishing returns), the maximum monopoly revenue 
will be reached at a higher price; if it is subject to the law of 
decreasing cost (increasing returns), it will be reached at a 
lower price. Suppose that the demand is such that the 
price falls off regularly with the increase of output. Then 
according to the law of constant cost we should have a table 
like this: 



Units Sold 


Price per 
Unit 


Gross 
Receipts 


Cost per 

Unit 


Total Cost 


Net 
Receipts 




Cents. 




Cents. 






500 


30 


$150 


10 


^50 


$100 


1000 


25 


250 


10 


100 


150 


20CO 


20 


4CO 


10 


200 


200 


3000 


15 


450 


10 


300 


150 


4000 


10 


400 


10 


400 





26o 



Normal Value 



[§ no 



Thus the monopolist will make the largest profits by putting 
the price at 20 cents and by selling 2,000 units. But if the 
law of increasing cost applies, according to the figures in the 
fourth column, it will pay him to put the price at 25 cents and 
to sell only 1,000 units. For: 



Units Sold 


Price per 

Unit 


Gross 
Receipts 


Cost per 
■ Unit 


Total Cost 


Net 
Receipts 




Cents. 




Cents. 






500 


30 


^150 


10 


I50 


^100 


1000 


25 


250 


12 


I2D 


130 


2000 


20 


400 


14 


280 


120 


3000 


15 


450 


16 


480 


-30 


4000 


10 


400 


18 . 


720 


-320 



On the other hand, if the law of decreasing cost applies, he 
will find it to his interest to charge only 15 cents and to sell 
3,000 units. For: 



Units Sold 


Price per 
Unit 


Gross 
Receipts 


Cost per 
Unit 


Total Cost 


Net 
Receipts 




Cents. 




Cents. 






500 


30 


^150 


10 


$50 


|ico 


1000 


25 


250 


8 


80 


170 


2000 


20 


400 


6 


120 


280 


3000 


15 


450 


4 


120 


330 


4000 


10 


400 


2 


80 


320 



In every case, as we see, there is a definite maximum mo- 
nopoly revenue. 

Monopoly price is therefore influenced by cost of produc- 
tion, but in a different way from competitive price. Whether 
it is higher than competitive price depends again on cost. 
Ordinarily it will be higher, because competitive price is cost 
price (i. e. marginal cost price), while monopoly price is above 
cost price. Where a monopoly, however, is created by former 
competitors to avoid some of the wastes of competition, the 



§ no] Normal Monopoly Value 261 

cost may be reduced so materially that it will be profitable for 
the monopolist to sell a largely increased supply at a lower 
price. In such a case monopoly price may be lower than 
competitive price. 

In some cases, again, monopoly price may be only very 
slightly above competitive price. It frequently happens that 
what seems to be monopoly is really subject to potential com- 
petition. As long as the monopolist is content to charge a 
price low enough to give only moderate profits, he may retain 
control of the output. But if he raises the price to an exces- 
sive point he may either, tempt other producers into the field 
or lead the consumer to choose some substitute. This latent 
or potential competition is a factor to be reckoned with in all 
cases where the monopolist is not safely intrenched by some 
legal or permanent economic advantage. 

Since monopoly profits depend partly on cost, the intelligent 
monopolist will strive to avail himself of the newest processes 
to reduce cost. Provided that demand is expansible he will 
seek to reduce price as long as gross receipts increase faster 
than aggregate cost; the greater the reduction of cost per 
unit, the more probable will this result be. Thus under favor- 
able conditions monopoly price tends to fall, even though at 
any time it may be above competitive price. The price of 
oil charged by the Standard Oil Company, for instance, has on 
the whole fallen, even though the fall in price has not kept 
pace with the still greater fall in the price of the crude petro- 
leum. But where the demand is not so expansible as in the 
case of municipal street railways or the gas supply, or where 
the monopolist pursues a short-sighted policy, the gap between 
monopoly and competitive price widens. 



CHAPTER XVII 
THE GENERAL LAW OF VALUE 

111. References 

J. B. Clark, Distribution of Wealth (1899), chs. xvii, xxv, xxvi; F. A. 
Fetter, Principles (1915) , ch. xxxix; A. Marshall, Principles (1910) , bk. v, 
ch, xiv; F. v. Wieser, Natural Value (1893), bk. iii, ch. viii; H. R, 
Seager, Principles (1913), chs. xvii, xviii; E. S. Meade, Trtist Finance 
(1903), chs. xvi, xvii; E. R. A. Seligman, Social Aspects of Economic 
Law, Presidential Address in Am. Econ. Assoc. Puhlications, 3d series, 
no. I (1904); H. J. Davenport, Value and Distribution (1908), ch. xxvii; 
H. Floy, Valuation of Public Utility Properties (19 12). 

112. Value and Cost of Production 

In the preceding chapter we have dealt with the value of 
reproducible goods. Value, however, attaches also to non- 
reproducible concrete goods as well as to relations and privi- 
leges, to human services and to a fund of capital. How far is 
the value of these related to the cost of production? 

It is clear that in the case of concrete non-reproducible 
goods value stands in no assignable relation to cost of produc- 
tion. The most prominent example is land. Land is not the 
result of production. To be sure, if a piece of virgin land lies 
idle and a town springs up around it, it will soon acquire an 
increased value; yet neither the land not any of its qualities 
has been produced by human agency. Efforts may indeed be 
expended on the soil, and in that sense some of its qualities 
might be deemed to be in part the result of production, but 
even here its value stands in no relation to the efforts of the 
individual. Again, take a piece of old sculpture or furniture. 
It cannot be reproduced; it may sell for a thousand times the 
original cost. Finally, consider two equally good pictures by a 
great painter but finished, the one before and the other after 

262 



§ 112] Cost of Production 263 

his attainment of renown. The difference in their value can- 
not be explained by any difference in cost of production. In 
short, the value of concrete non-reproducible goods is neither 
fixed nor measured by cost of production, either because they 
have never been produced at all by human agency, or because 
they cannot be reproduced, or because there is no assignable 
relation between the effort of the producer and the present 
price of the product. Whether these goods be rented or sold, 
their rental as well as their capital value does not depend on 
cost of production. 

The value of that class of economic goods known as rela- 
tions and privileges likewise stands in no direct relation to 
cost of production. Privileges and relations vary as much in 
character and value as any other kind of economic goods. 
They may re-present only a single use, like a put or call on 
the stock exchange, or a continuous series of uses, like a per- 
petual franchise of a corporation. When they are capitalized, 
their value, like that of all other goods, is affected by the dura- 
bility and certainty of enjoyment. A permanent franchise of 
a railway differs from the limited privilege of a patent; but in 
the one case as in the other the durability and certainty of the 
use are independent of the personality of the possessor. With 
the good-will of a business, however, the continuance of profit- 
able relations is often so largely conditioned by the business 
capacity of the temporary possessor that there is less difference 
between capital and rental value than in the case of a more 
permanent or a perpetual privilege. In some instances the 
trade-mark is the chief asset of a business. The president of 
the American Chicle Company recently testified that the con- 
sumers of chewing gum had become so accustomed to certain 
well-advertised brands that the company was able to pay divi- 
dends on a capitalization nine times the amount of tangible 
assets. Over eighty-eight per cent of the value of the property 
was due to the trade-mark.^ 

1 U. S. Industrial Commission, Final Report, § 612. 



264 General Law of Value [§ 113 

Whether privileges are durable or ephemeral, it is clear that 
their value — whether rental or capital value — does not de- 
pend upon any cost of production. The good-will of a 
business may indeed in one sense be deemed the result of 
laborious exertion, but the value of the good-will does not 
stand in any assignable relation to the exertion. It may exist 
to-day and disappear to-morrow, without any visible change 
in the proprietor. Most franchises and privileges, moreover, 
are not the result of any one's exertion; they are the conse- 
quences of intricate social relations, and consist of the opportu- 
nity of turning these relations to profit. Take even so simple a 
case as that of a news-stand in a city. The owner often rents 
out the privilege of serving newspapers to a list of customers, 
and when the stand is sold outright the chief constituent in 
the price is the value of the "route," — the capitalization of 
the income from the privilege of serving customers. Yet this 
route may have cost the original owner nothing to acquire; 
as the street was built up, the route increased in value, as it 
were automatically. So also the franchise of a railway, the 
circulation of a country newspaper, the selling value of a gas 
or water company grows with the mere process of time and the 
increase of population. The social relations which form the 
basis of their activity are not produced by any individual; 
the privileges of utilizing these relations have no cost of pro- 
duction. Yet they have a very decided value. 

It is not necessary to illustrate further. All these things — 
relations, privileges and non-reproducible concrete goods — 
are daily bought and sold in the market -place, and yet their 
value does not directly depend on their cost of production and 
cannot be measured by it. Since cost of production cannot be 
the general law of value, what is that ultimate law? 

113. Value and Efficiency. 

We have learned that value is at bottom the expression of 
marginal utility. It follows that all prices must be studied 



§ 113] Value and Efficiency 265 

from the point of view of marginal utility, that is, of the power 
of marginal increments of supply to satisfy the marginal in- 
crements of demand. This is only another way of stating 
that the fundamental explanation of value is marginal effi- 
ciency, or the capacity of marginal units to satisfy marginal 
wants. 

(i) In the case of concrete non-reproducible goods this is 
patent. When a farmer hires a piece of land, the rent which 
he pays depends on the produce of that special grade of land 
as compared with others. When a speculative builder secures 
a site, the price of the lot is fixed by its capacity, from the 
point of view of eligibility, to satisfy the wants of a particular 
class of tenants. Whether he pays a capitalized purchase 
price or an annual rent, as in England and some parts of 
America, is immaterial. Again, the value of a painting, old 
or new, is regulated by its capacity to appeal to the taste of a 
particular class of amateurs, that is, by its marginal efficiency 
in contributing to the satisfaction of certain wants. Cost of 
production, as we have learned, plays no direct role in the 
determination of value of this entire class of cases. Not cost, 
but efficiency, is the explanation. 

(2) With that class of economic goods that we have called 
relations or privileges the situation is analogous. The rental 
of the news-stand, the franchise of the gas company, a patent 
or copyright, a new brand of goods or a trade-mark, — the 
value of all such intangible relations depends on the extent to 
which they contribute to the earnings of the business. Their 
value is conditioned by the marginal efficiency of the services 
which they render. The cost may have been zero; — not 
cost, but efficiency, affords the clue. 

(3) The great mass of concrete reproducible goods has 
been discussed in the preceding chapter. Here indeed cost 
of production seems to be of commanding importance. As 
we have learned, however, it is not so much that prices of 
such goods are fixed by the cost of production as that they 



266 General Law of Value [§ 113 

are fixed at the cost of production. The value of all produc- 
tion goods is derived from the value of their products, — the 
consumption goods; the value of the raw material is derived 
from the value of the finished product. The price of pig iron 
depends on the price of the nails, billets and all other iron 
products into which pig iron enters as a constituent. If the 
demand for these products should diminish, the price of pig 
iron would fall, those who produced at a higher cost would 
stop producing, and the new (marginal) cost of production 
would adjust itself to the new price. There is an abundance 
of silver below the surface that is not mined because it will 
not pay; if the marginal efficiency or value of silver should 
rise, these more expensive grades would at once be marketed 
and the new marginal cost of production would adjust itself to 
the price. The price would not rise because the cost increased; 
but the higher price would be fixed at the higher cost because 
that would now be the new point of marginal efficiency. 

(4) We come, finally, to the value of human services and of 
the fund of capital. Wages and interest are of such signal 
importance in the distribution of the social income that their 
fuller discussion will be reserved until later. It may, however, 
be said provisionally that they, like everything else, derive 
their value from the marginal increments of the services which 
they render, that is, from their marginal efiiciency. To the 
extent that labor is productively employed the rate of wages in 
each grade of labor must in general tend to equal the mar- 
ginal efficiency of the labor, that is, its contribution to the 
product at the margin of employment. In the same way the 
rate of interest will tend to equal the marginal efficiency of 
capital, that is, the actual contribution of the marginal incre- 
ment of capital employed. How these marginal contributions 
of both labor and capital are to be measured, and how the 
changes of actual life move the margin of this efficiency up or 
down, remain to be considered later. 

Labor and capital, however, are susceptible of increase. 



§ 113] Value and Efficiency 267 

Will they then not increase up to the point of continuous cost 
of reproduction, and can it not be said that their value is fixed 
by the cost of production? In the case of labor, if by cost of 
production we mean the cost of the physical reproduction of 
the laborers, we encounter the difficulty that human beings are 
not reproduced for economic reasons. But even if we restrict 
our attention to the economic causes of the growth of popula- 
tion, and aver that the future supply of laborers depends on the 
cost of reproduction, that is, of bringing them into the world 
and nourishing them until they become self-supporting, the 
obvious rejoinder is that this expense is a result rather than a 
cause, and that what the laborer can afford to spend on his 
family will depend upon the wages which he receives. It is 
as in the case of reproducible commodities, where value is 
fixed at the cost of production, but not by the cost of produc- 
tion. The contribution or efficiency is the positive cause; the 
cost of production adjusts itself to this. 

In the same way, to speak of the cost of production of the 
mass of capital is ambiguous. Capital as a fund or embodi- 
ment of value has in one sense no assignable cost. To ask 
what is the cost of production of a thousand dollars is un- 
meaning. The thousand dollars may represent the present 
value of no longer fashionable dress-goods which originally 
cost fifty thousand dollars, or it -may represent the value of a 
newly discovered petroleum well which cost the finder nothing. 
In another sense, however, capital has a cost. The mass of 
capital consists of individual pieces of capital, and the increase 
of capital depends ultimately, as we shall see, on the readiness 
to forego present gratifications for future satisfactions. This 
readiness involves a delay and generally therefore a cost; and 
interest, as we shall learn, may be explained in terms of this 
marginal cost. But here again the cost would not be under- 
gone if it were not for the services to be enjoyed. So that in 
the end it is the efficiency of the service which is the positive 
factor. The cost adjusts itself to the service. 



268 General Law of Value [§ 114 

Thus the great law of value is marginal efficiency. When 
the economic good is used for productive purposes, marginal 
efficiency becomes marginal productivity; but when it is used 
for purposes of consumption, we cannot well speak of pro- 
ductivity. Not only in the case of wages and interest, but in 
the case of economic relations and of concrete commodities, 
reproducible as well as non-reproducible, prices depend on 
marginal efficiency. In all economic goods except labor, we 
have to deal with capital values; in all economic goods except 
the fund of capital we have to deal with rental values: the 
rental as well as the capital values of all classes of goods de- 
pend on their marginal efficiency. In some cases marginal 
efficiency means marginal productivity; within this class again 
marginal productivity is in some cases equivalent to the cost 
of production. Cost of production is thus only a partial, and 
even then a proximate, explanation of value; marginal effi- 
ciency is the universal and the ultimate explanation. 

114. Efficiency and Capitalization 

Because of this frequent lack of correspondence between 
value and cost, the problem of the valuation of complex goods 
often becomes one of extreme difficulty. Where such a good 
regularly changes hands on the competitive market, the diffi- 
culty is obviated by the automatic action of the forces of 
demand and supply; its earning capacity or marginal service- 
ableness can be gauged with almost unerring accuracy, and there 
will be a fixed rate of capitalization depending, as we have 
learned, on the durability and certainty of income. A good ex- 
ample of this equilibration between income and capital value is 
seen on the stock exchange, where the slightest alteration in 
present or prospective earnings is at once reflected in a fluctua- 
tion of the quotations. Even here, however, we must remember 
that the stock exchange quotes only market values; and that 
these market values are liable to be affected by all kinds of specu- 
lative influences not connected with real earning capacity. 



§ 115] Valuation and Taxation 269 

In actual life we have to deal with all possible combinations 
of economic goods. The value of a simple reproducible com- 
modity may indeed be explained by or referred to the cost of 
production, because at any given time this cost is adjusted to 
the price; but the value of a complex product or business may 
bear only a slight relation to cost. The value of a livery 
stable differs somewhat from the value of reproducing the 
horses, carriages, harnesses and buildings; the value of a huge 
steel plant differs considerably from the cost of the land, the 
buildings and the machinery; the value of a railroad has still 
less relation to its cost of production or of reproduction. In 
such ca^s we have to do not only with reproducible products, 
like the concrete articles of steel or the acts of transportation, 
but with non-reproducible commodities and relations, like the 
good-will of the firm, the favorable location of the railroad, 
the ability of the managers, and all the other factors which 
cannot be duplicated, but which enhance the profitableness 
and therefore the value of the business. Their selling value is 
a capitalization of their estimated future uses. 

The problem of capitalization in its relation to efficiency 
has become important in three fields, — that of taxation, that 
of regulation and that of investment. To each of these we 
must now turn our attention. 

115. Valuation and Taxation 

In taxation the problem presents itself in two forms. The 
first arises in those countries which still retain the property 
tax. The difficulty can be illustrated by the taxation of cor- 
porations. In Europe corporations are assessed on their 
income, which is ascertained according to fixed rules. In 
America corporations are, for reasons already mentioned 
(p. 15), usually assessed on their capital value. How, now, is 
this to be measured? The corporate securities are often not 
dealt in on the stock exchange, and even when there are such 
dealings, the daily prices may be affected by speculative causes. 



270 General Law of Value [§ 115 

The cost of production is of slight assistance, because it can 
manifestly apply only to the concrete tangible property, and is 
even there inadequate. It is for this reason that the valuation 
of the corporate franchise, as the chief intangible element, has 
become such a burning question in the United States. It is 
plain, however, from the foregoing discussion, that no final 
solution of the problem is possible until property assessments 
are brought into a definite relation with earning capacity. 
When commodities frequently change hands, as is the case 
to-day with the mass of concrete goods, real or personal, 
property is a simpler basis of assessment than income, because 
the market influences automatically capitalize the . income. 
But when sales are infrequent, as with so many modern cor- 
porations, income or rental value is the better basis, and the 
so-called property assessments must ultimately adjust them- 
selves to the earning capacity. The practical difficulty con- 
nected with the ascertainment of net earnings has led many 
States to adopt the system of gross earnings taxation. This is, 
however, a rough device, which fails to secure justice as among 
the members of each class; corporate gross earnings tell us as 
little about relative net earnings as the mere size of a man's 
business about his profits. It is significant that in the newest 
attempts to fix the property valuations of railroads, as in Michi- 
gan, the assessors after computing the selling value of the tangible 
property estimate the value of the intangible property by 
capitalizing a certain portion of the income at a given rate. 
Taxable value is made to depend ultimately on earning capacity, 
— that is, on marginal efficiency. 

The other phase of the problem is of broader application. 
The well-nigh universal source of state and local revenue in 
America is the general property tax. Abihty to pay is deemed 
to be the fundamental canon of taxation, and a man's ability 
is measured by his property. Owing, however, to the growing 
difficulty of ascertaining all the items of property, certain classes 
are reached with less accuracy than others, and the tax be- 



§ 115] Valuation and Taxation 271 

comes virtually a partial property tax. From this inequality 
of taxation flow two important consequences. In the first 
place we have the phenomenon of diffusion of taxation. Where 
a particular class of property is singled out, the tax will often 
be shifted from the producer to the consumer, or from the 
vendor to the purchaser. If a special tax, for instance, is levied 
on leather, and the conditions of the trade are such that the 
marginal leather dealer can still remain in business, the tax 
will be added to the price that the shoemaker has to pay; and 
under similar conditions the shoemaker will increase the price 
of shoes to the consumer. The tax is shifted from one class to 
another until it is diffused throughout the community. If a 
special tax is levied on houses, and population nevertheless 
continues to increase, the tax will be shifted from the owner 
to the tenant, and if the tenant happen to employ the premises 
for business purposes, the tax will be added to the price of 
the goods displayed for sale. Furthermore, if these goods 
are utilized as the materials of some new production, the pro- 
cess will repeat itself, until the final consumer is reached. 
If a tax is levied on real estate mortgages, the rate of interest 
will rise by at least the amount of the tax, and the burden will 
be borne, not, as is often assumed, by the one who lends, but 
by the one who borrows; and if the borrower happens to be 
a housebuilder, it will be further shifted to the purchaser and 
again to the tenant, with ulterior conseqiiences analogous to 
those just described. Through the process of shifting, taxation 
of the property often turns out to be different from taxation of 
the property owner. 

On the other hand, when, instead of dealing with perish- 
able things like leather or houses, or with a mere right to a 
sum of money like a mortgage, we deal with more permanent 
things, Hke a piece of land or the fund of capital itself, the 
influence of capitalization makes itself apparent. If a tax of 
one per cent is imposed on a five per cent hundred-dollar 
bond selling at par, the net proceeds to the new purchaser will 



272 General Law of Value [§ 115 

be only four dollars, and the price of the bond will fall to 
eighty dollars, — four dollars bearing the same proportion to 
eighty dollars as five to a hundred dollars. There is no reason 
why people should content themselves with four per cent 
earnings when the general rate of interest in the untaxed field 
is five per cent. In the same way, when a special tax is levied 
on land, its value will be reduced by the capitalization of the 
tax. The important consideration in each case is the net 
income, or net rental; and when this is curtailed by the 
imposition of a tax, the selling value will be reduced in pro- 
portion. Since the selling value is the capitalization of the 
rental value, the diminution in the selling price is equivalent 
to a capitalization of the tax. When a new purchaser buys 
the bond or the land, he discounts future taxes of the same 
rate by paying so much less for the property; in other words, 
he buys himself free of the tax. Just as the tax in the pre- 
ceding case was shifted, so now the tax is absorbed, — absorbed 
into a lower selling price. 

The far-reaching consequence is this: when classes of prop- 
erty are taxed, the processes of diffusion and of absorption 
often result in what may be termed the elision or final disap- 
pearance of the tax. Under the conditions of modern busi- 
ness enterprise, when people part with their property the tax 
tends finally to disappear as a permanent burden on the class 
upon which it is sought to be imposed. It is not necessary, 
therefore, in order to secure justice in taxation, that all individ- 
uals or every item of property be taxed. Within each class of 
property holders every one indeed must be assessed; but as 
between the classes of property economic forces will bring 
about a readjustment. The process is often a painful one, 
and in order to injure the present owners as little as possible 
great care must be observed in altering existing methods. 
But the ideal of imposing taxes on property, rather than upon 
individual property owners, must be constantly kept in mind. 
The attempt in the United States to assess every perso'n upon 



I 



§ ii6] Valuation and Regulation 273 

all his property creates gross injustice, because by our hit-or- 
miss system some individuals in a given class are assessed and 
some escape. Those that escape are generally the wealthy; 
those that are reached are for the most part the ones who 
cannot afford to pay. The general property tax practically 
results in a travesty of justice. When we abandon the imprac- 
ticable attempt to tax all property owners alike, and when, 
realizing that taxation like value itself is a social phenomenon, 
we learn to tax some kinds of property rather than all kinds 
of individuals, we shall have made a great stride forward in 
practical as well as theoretical justice. It is a process which 
is now slowly going on in the more advanced industrial com- 
munities of America. Consciously or unconsciously, it rests 
upon the conviction that capital or property values depend in 
last instance on marginal efficiency or net earnings. 

116. Valuation and Regulation 

Another phase of the problem is seen in the difficulty con- 
nected with the official regulation of rates charged by railroad, 
gas or water companies. Where such businesses tend to be- 
come monopolies the legislator seeks to protect the consumer 
from exorbitant charges by fixing maximum rates. In justice, 
however, the criterion of what is fair to the consumer must be 
affected by what is fair to the producer, for the producer is 
also entitled to a fair return on his capital. The whole prob- 
lem thus hinges on the question: what is the relation of the 
actual capital value of the business to the invested capital? 
Is the actual value the par value of the securities? Manifestly 
not, because the stock may have been watered to such an ex- 
tent that its actual value is only a fraction of the par value. Is 
it the market value of the securities? Not always. For the 
market value of the bonds depends not only on the rate of 
interest, but also on the period for which they have to run. If 
a four per cent bond sells at par, a six per cent bond of the 
same corporation and of the same security would normally sell 



274 



General Law of Value 



[§ii6 



around 150. But if the four per cent security is a long-time 
bond, and the six per cent a short -time bond, the difference 
will be far less. Furthermore, even if they are both fifty 
year bonds but emitted at different periods, and if the six per 
cent bond matures in a few years, the premium will rapidly de- 
cline with each ensuing year until it finally disappears. The 
market Value of the bonds hence depends largely upon the 
conditions of repayment, and is to this extent divorced from 
the value of the corporate property as such. Moreover, if we 
take stocks instead of bonds, we find that the value of the cor- 
porate property cannot be strictly measured by the market 
value of the shares, because this market value is subject to 
violent oscillations on the stock exchange. The market value 
of the shares of the Third Avenue Street Railway Company in 
New York fluctuated a few years ago over one hundred per 
cent in the same year. On what basis could the real value 
have been computed? 

Finally it may be asked: is the actual capital value of the 
corporations to be measured by the cost of production or of re- 
production (or, as it is sometimes termed, the cost of replace- 
ment)? Here, again, the answer is, not entirely. For this 
method would take no account of the franchises, acquired re- 
lations and general business conditions which have developed, 
and for the creation of which the corporation may or may not 
be responsible. A railway running through a frontier com- 
munity may cost in stretches as little as fifteen thousand dol- 
lars a mile to build; after the lapse of twenty years, the cost 
of reproduction as measured by double tracking, better road- 
bed, new stations, bridges, equipment and increased value of 
the land may be perhaps thirty thousand dollars a mile. Yet 
a capitalization of the actual earning capacity might result in 
at least double that sum. To declare the entire difference to 
be ''water," and to adjust rates so that the old stockholder 
should not profit by the building up of the country, or so that the 
new purchaser who has invested in good faith should have his 



§117] Valuation and Investment 275 

income cut in half would manifestly be unjust. A corporation, 
like an individual, is entitled to participate in the advantages of 
general prosperity. 

The Supreme Court of the United States has recognized the 
truth that not one, but all of these factors must be taken into 
consideration.^ The ultimate test of fair capital value depends 
on a comparison of the earnings of the enterprise in question 
with those of well-managed and reputedly not overcapitalized 
undertakings of a similar character. 

117, Valuation and Investment 

The third difficulty connected with valuation and capitaliza- 
tion is seen in the flotation of securities at the time of the organi- 
zation or reorganization of great business enterprises. In former 
years the chief example was that of railroads. While the early, 
small railroads were largely built on the proceeds of money 
actually invested by the shareholders, it was not long before 
the doubtful success of the more elaborate enterprises in newer 
sections led to the issue of mortgage bonds, often below par, 
while the stock was sold at an insignificant price or even pre- 
sented to the shareholders, in order to make a better market 
for the bonds. In the same way, when railways were amalga- 
mated or reorganized, the issue of new stock often exceeded the 
aggregate of the old, the excess representing the capitalization 
of the increased earnings which it was expected would result 
from the combination. In these two cases the issue of stock 
might be economically justifiable either as the sole practicable 
method of securing capital for a new and doubtful enterprise, 
or as the best means of reducing prospective earnings to a 

1 Smyth V. Ames, 169 U. S. 466 (1898). " In estimating the value of 
a railroad, the following points must be considered : The original cost of 
construction, the amount expended in permanent improvement, the 
amount and market value of the bonds and stock, the present as com- 
pared with the original cost of construction, the probable earning 
capacity of the property, and the sum required to meet operating 
expenses." 



2/6 



General Law of Value 



[§ 117 



present basis. In the one case the stock presented or sold at 
a discount represents the present worth of an insecure and 
speculative future; in the other case the stock is the capitaliza- 
tion of a future income, just as the issue of securities for doub- 
ling the track is legitimate only when the traffic is expected 
to be so heavy as to increase the income at least to the point 
of earning a return on the new capital. In all such cases we 
cannot properly speak of overcapitalization or stock-watering. 

Unfortunately, however^ there is always the danger that the 
anticipations may be mistaken, or that the calculations may 
be designedly falsified in order to enable the manipulators to 
dispose of stock whose worthlessness they suspect or know. 
Finally, when it seems desirable, for the purpose of evading 
legislative restrictions or of placating public opinion, to keep 
down the dividend rate, the amount of stock may be augmented 
by the device of scrip dividends or an increase of the nominal 
amount of the securities in the hands of the shareholders. In 
all such cases we have to deal with stock- watering pure and 
simple, — that is, the creation of additional securities which do 
not represent additional earning capacity. 

Since the formation of the modern industrial combinations 
known as trusts, this aspect of capitaKzation has assumed still 
greater importance. The chief danger of the situation con- 
sists in the facility afforded to unscrupulous promoters to 
finance the organization of the combination in such a way as 
to deceive the investors and to reserve the greatest profit for 
themselves, by selling the inflated securities at prices wholly 
unjustified by prospective earnings. The mere fact that the 
united capital of a combination exceeds the aggregate capital 
of the constituent companies does not prove the existence of 
overcapitalization; for if the new enterprise is honestly financed 
and well managed, the very fact of union may so enhance the 
earning capacity of the whole as to justify this capitalized antici- 
pation of estimated profits. The distinction between economic 
and uneconomic finance or between actual value and water in 



§ iiy] Valuation and Investment 277 

the investment of capital is the distinction not only between 
honesty and dishonesty but between intelligence and stupidity. 
While stupidity will always avenge itself on the stupid, the 
burden of dishonesty is likely to be borne by the innocent 
victim. When the loophole of competition is left open, the 
victim is not the consumer but the unwary investor; when 
competition is stifled, the loss ^may fall on either or both. 
The modern demand that government should at least insure 
publicity of accounts and a reasonable correspondence between 
the prospectus and the actual facts in organizing vast enter- 
prises is a natural result of the dangers of overcapitalization. 



Book II 
Value and Production 



CHAPTER XVIII 
CHARACTER AND FACTORS OF PRODUCTION 

118. References 

A. Marshall, Principles (1910), bk. iv, ch. i; W. Smart, Distribution of 
Income (1899), bk. i, ch. v; F. A. Fetter, Principles (1915), chs. ix, x; J. S. 
Nicholson, Principles (1893-1901), bk. i. ch. ii; J. A. Hobson, Economics 
of Distribution (1900), ch. vi; H. Sidgwick, Principles (1883), bk. i, 
chs. i, iv; F. A. Walker, Political Economy (1888), part 2, ch. iv. 

119. Production: Its Meaning and Relation to 
Consumption 

AH wealth may be regarded from the point of view of the 
producer or of the consumer. Commodities in the hands of 
the consumer and destined to immediate consumption are 
sometimes called consumers' goods, while those forms of 
wealth reserved for the purpose of increasing the stock of 
consumable commodities are called producers' goods. Be- 
cause the latter serve as instruments of production, they are 
sometimes called instrumental goods. 

Production and consumption clearly refer only to utilities. 
Man can create nothing material; he can only impart motion 
to particles of matter and so rearrange them that in their new 
form they will gratify some desire. So also he can destroy 
nothing material, for matter is indestructible; he can only so 
rearrange the position of the particles as to put an end to 
their utility in that particular form. Production and consump- 

278 



§ 1 19] Relation to Consumption 279 

tion thus mean the creation and destruction, not of matter, 
but of utihties through the movement of matter. 

From a certain point of view production and consumption 
are two sides of the same thing. All wealth is sooner or later 
destroyed in the sense that the utilities embodied in the 
particular commodity finally come to an end. Every new 
arrangement of matter by man ultimately involves an act of 
consumption, partial or complete. We cannot produce any- 
thing without consuming something, — either commodities or 
energy, which is itself in last resort maintained by commodi- 
ties. We can make steam only by using coal; we can produce 
goods only by wearing out the tool or machine. Not only 
does production involve consumption, but consumption might 
be said to involve production. Production is the creation of 
utilities. Commodities are consumed because they satisfy 
some want, and in satisfying this want they impart utility. So 
that all consumption short of wanton or accidental destruction 
would seem to imply production, because it indirectly yields 
utilities. Consumption would then involve production, just as 
production involves consumption. 

The distinction, however, is none the less real, even though 
difficult to draw in special cases. The criterion of production 
is not the imparting of a utility, but the creation of a new 
utility. It is only when an action brings about an addition to 
the existing sum of utilities, when, in other words, there is a 
resulting surplus of utility, that we have an act of production. 
When a railroad company buys coal and converts it into loco- 
motive power, there is an act of production, because, notwith- 
standing the consumption of the coal, the utilities afforded by 
the steam replace those afforded by the coal together with an 
addition. There is more wealth than before. On the other 
hand, the food which a man consumes, although it serves to 
keep up his strength, imparts to him certain personal quali- 
ties which, as we know, are not wealth. They may help him 
to produce wealth in the future, but do not in themselves 



28o 



Production 



[§119 



constitute wealth. The consumption of coal by an engine 
and of food by*a laborer are therefore not on a par; the one 
is an act of production, the other an act of consumption. In 
the one man produces wealth; in the other wealth produces 
man. Production and consumption are as opposed as wealth 
and man. 

Since wealth and man are mutually interdependent, produc- 
tion and consumption are closely related. In a well-ordered 
community the object of consumption is more production of 
wealth and ultimate welfare. Consumption, however, does 
not necessarily lead to this result. A glutton who wastes his 
life in riotous living decreases his power of serving others. 
Thus, while consumption may be productive in the sense that 
it creates the conditions of a future production, consumption 
differs from production. Wise consumption indeed leads to 
more production: only in this sense are they two aspects of 
the same thing. The whole economic process is a flow of 
utilities from nature to man, and back from man to nature. 

It is important to remember, moreover, that the utilities 
which constitute wealth are not necessarily embodied in tan- 
gible objects. Production is not Umited to the creation of 
physical commodities. The older economists maintained that 
the labor of servants, actors and the professional classes in 
general was unproductive, because not incorporated in visible 
objects. So other writers, like Carey, have urged that the 
trader is unproductive; and still others, like the Physiocrats, 
have contended that only the farmer is really productive. To 
those who understand that human wants are satisfied by utiH- 
ties, irrespective of the source whence they flow, it is clear 
that all labor which engenders such utiUties is productive. 
Labor is unproductive only when its efforts are wasted. If I 
write a book which is read, or make a table which is used, my 
labor is productive; if the book is a failure, or the table use- 
less, my labor is unproductive. The trader, the lawyer, the 
doctor, the artist, are no less productive than the workman, 



§ i2o] Kinds of Production 281 

the farmer or the manufacturer, provided they accomplish 
something that society wants. The test is the creation of 
new utiUties or values. 

The utilities of which we speak are, again, not necessarily 
direct utihties. The making of electric lights is the creation of 
direct utilities; the erection of a successful school devoted to 
the study of electricity is the creation of indirect utilities, 
because it will ultimately result in better and cheaper lights. 
In the one case we are producing commodities, in the other 
productive forces; in both cases we are contributing to the 
production of wealth. In the same way the sums expended by 
a government for its army and navy may be productive in the 
highest sense if, as sometimes happens, they really contribute 
toward the protection or furtherance of the national industry 
or of the national existence which makes industry possible. If 
they do not do this, they are unproductive, but only in the 
sense that any unnecessary or wasted effort is unproductive. 
Intangible products, Hke culture and taste, are often extremely 
important to individual and state alike, and when they rest on 
a broad basis of tangible wealth they are the distinguishing 
mark of a high civilization. 

120. Kinds of Production 

Production of wealth thus means the creation of new utili- 
ties. The utilities that can be added to things are of three 
kinds, — material, place and time utilities. A material utility ^ 
can be created by an alteration in any property of matter; a 
change in the form, shape, weight, color, taste, smell or any 
other quality of a thing which increases its capacity to satisfy 
human wants is the creation of a new material utility. Utility 
can, however, also be enhanced by a change of place. A thing 
in one place may be worth more than in another. If the wheat 
were allowed to remain on the Western plains, its utility would 

^ Some writers speak of this as a form utility. It is clear, however, 
that form is not the only quality susceptible of change. 



282 Production [§ 120 

be greatly circumscribed; instead of satisfying the wants of 
millions, it would be consumed only by thousands. Finally, 
utilities can be augmented by a mere change in time. The 
alteration may take place in the supply: old coins, fine statues, 
rare prints and the like improve in desirability through the mere 
lapse of time; forests, flocks and the like increase in quantity. 
More frequently, however, the alteration occurs in the demand: 
things may be more useful at one period than at another. The 
efforts expended in holding the commodity until it can be of the 
most effective service involve the creation of time utilities. 

All wants are satisfied, if at all, at a given time and place. 
The creation of time and place utilities is as truly productive 
of wealth as the creation of elementary material utilities. In each 
case we enhance the capacity to gratify desires. Trade and 
transportation, which deal with place utilities, as well as specula- 
tion and insurance, which deals with time utilities, are no less pro- 
ductive than the activity expended in creating material utilities. 
It is for this reason that the subject of exchange is properly to 
be regarded as a part of production. It is for the same reason 
that it is impossible to classify different kinds of activity as in 
themselves more or less productive or non-productive. The 
causes which condition the law of comparative costs vary from 
time to time and from place to place. Where land is cheap, 
agriculture may be more productive than industry; where 
geographical conditions are favorable, commerce may be more 
productive than either. To raise oranges in the Arizona desert 
would be as unproductive as to put a steel plant in the wheat- 
fields of Kansas; yet when the Arizona desert is made to 
bloom by irrigation, or when Kansas becomes the home of a 
teeming population, oranges and steel may become the most 
productive of enterprises. The same considerations apply to 
the productivity of efforts embodied in immaterial wealth. For 
Oklahoma to build a magnificent art gallery would be clearly 
wasteful; for New York to spend large sums on music and art 
may be highly productive, even regarded from the narrow point 



§ i2i] Factors of Production 283 

of view of increasing the capacity of the artisan to create more 
artistic and therefore more valuable products. A high-priced 
school-teacher would be as unproductive at the country cross- 
roads as a piano factory in Alaska. Productivity depends on 
the ratio of efforts to needs; with changing needs the same 
efforts will mean an altered productivity. 

121. Factors of Production 

Since the foundations of economic life are nature and man, 
the primary factors of production must be natural forces and 
human effort. Sometimes natural forces alone suffice, — as in 
the case of the spontaneous increase of a herd of cattle; 
sometimes human effort suffices, as in the case of the rendering 
of a personal service; ordinarily production involves the co- 
operation of the two. This is sometimes expressed by the 
statement that the factors of production are labor and land, — 
a not entirely accurate statement, because land is only one 
of the natural elements that come into consideration. Water, 
light, heat, electricity, moisture and the like also play a role in 
production, and frequently constitute economic goods with a 
definite exchange value. Again, since the application of labor 
to natural elements results in material objects, which are then 
further utilized in production, these are often spoken of as 
capital, and the factors of production are declared to be land, 
labor and capital. Capital would then be differentiated from 
land in that capital is itself an artificial product, while land in 
the wider sense is a gift of nature. 

The question whether land should be sharply separated from 
capital may be left for later consideration (§ 132). It may, 
however, be stated here that the controversy is largely one 
of words, depending on the sense in which capital is used. If 
by capital we mean a concrete commodity, the joint product 
of labor and nature, land is to be differentiated from capital. 
If, on the other hand, by capital we mean wealth as a fund, 
land is a part of capital, since it has a capital value. Even, 



284 Production [§ 121 

however, if we consider land as a part of capital, it is so im- 
portant a part that it may for many purposes be put in a 
category by itself. 

Again, since the labor of directing or managing enterprises 
has become so significant, we might distinguish between labor 
in general and the skill or ability to conduct a business. The 
factors of production would then be land, labor, capital and 
management or enterprise. This classification, however, is not 
entirely free from objection. If a shoemaker works for another, 
his activity would be called labor; if he works for himself, it 
would be called enterprise. If a factory owner manages his 
own plant, it would be enterprise; if he sells it to a trust and 
assumes the management as a paid official, the same activity 
is called labor. Manifestly this overlooks the fact that there 
are all kinds or gradations of labor, from ordinary unskilled 
work to the exercise of the highest business talent. It is clear, 
from the examples just given, that the distinction is impor- 
tant rather from the point of view of distribution than from 
that of production. If the income from labor is a stipu- 
lated one, it is wages, whether it appHes to a day laborer or 
to a railway president; if the income is a contingent one it is 
profits. If a man uses his own unaided labor, he can earn 
wages; if he combines his labor with capital in a business en- 
terprise or if he employs other people's labor, he undergoes 
risks and his income is uncertain. The hired or salaried man 
always gets a part of the product, the independent entrepreneur 
may lose money instead of making it. The law of profits is 
different, as we shall see, from the law of wages. From the 
point of view of production, however, enterprise is a species 
of labor. 

Finally, it must not be forgotten that in civiHzed society 
production is carried on amid an environment moulded by 
legal, poUtical and social relations. All these may in a sense 
be declared necessary to production; but as they are in theory 
at least applicable to all alike, they are not to be included 



§ 122] Production and the Producer 285 

among the economic factors of production any more than is 
the air which is free to all. Even where these relations in the 
shape of special laws or privileges favor some producers or 
classes, they are properly to be put under the head of oppor- 
tunity to utilize labor and capital rather than under that of 
the primary factors of production. 

Summing up, we may say that the factors of production are 
in one sense labor and capital; in another sense land, labor 
and capital, and in still a third sense land, labor, capital and 
enterprise. In any sense the factors of production are human 
energy and natural forces, together with their joint product, 
capital, which may again be embodied in land or other ele- 
ments of nature. 

122. Production and the Producer 

Whatever classification of the agents of production may be 
adopted, one vital distinction must be observed. In the case 
of the non-human factors of production, whether they consist 
of natural forces or the results of the application .of labor to 
nature, we have to deal with inanimate objects and phenomena. 
The laws of their increase can be considered without refer- 
ence to any but the technical consequences to the things 
themselves. Where changes, for instance, take place in the 
productivity of concrete things, the social results — that is, the 
influence on classes of human beings — may- indeed be pro- 
found, but the objects in themselves still remain inert masses, 
and the laws which control their earnings are irrespective of the 
particular individuals that happen to own them. When the 
machine is useless, we throw it aside; when the land is worn 
out, we leave it. 

On the other hand, when we deal with human energy, we 
cannot dissociate it from the individual who exerts the energy. 
This does not mean that the laws of production are less verifiable 
here than in the case of inanimate objects. For the personal 
equation or difference between individuals presents no more 



286 Production [§ 122 

difficulties in analysis than do the differences between things. 
The distinction is to be sought rather in the fact that in 
the one case we deal only with the means and in the other 
with both the means and the end. Human energy, like in- 
animate objects and forces, forms the tools by which wealth 
is secured; man alone represents the end for which wealth 
is secured. Hence in dealing with the problems of production 
through human agencies we cannot eliminate the consideration 
of the producer as at the same time a consumer. This has a 
double aspect. 

In the first place it admonishes us that the process of pro- 
duction is social, and that all production ultimately involves 
consumption. Any system of production, therefore, which 
systematically neglects the consuming powers of the producer 
must in the end defeat itself. The methods of production may 
conform to all the approved technical rules, and each industry 
may seem to be flourishing from the point of view of output, 
yet none the less the general condition of business may be far 
from satisfactory owing to the lack of an adequate demand. In 
former times, where production was relatively slight, as in the 
middle ages, or where it was largely based upon unpaid human 
labor, as in antiquity, it was the luxuries of the few rather than 
the wants of the many that constituted the bulk of the demand. 
In modern times, on the other hand, where human energy is 
untrammelled and the play of competition tends to become 
ever more free, the effective demand comes from the wants of 
the many. If we stunt this demand, we withdraw the chief 
stimulus to wealth creation. The human beings may be mag- 
nificent productive instruments, but if there is no market for 
their products their potential energy is not converted into 
actual results. The more democratic the people, the more 
intimate is the dependence of the productive power of the 
community upon the consuming capacity of the masses. 

Secondly, we must be careful to take the broad view of 
the economic process. As we have seen, the real concern of 



§ 122] Production and Producer 287 

economic inquiry is not wealth iii itself, but wealth in its rela- 
tion to man, or, still better, man in relation to wealth, A 
system of production which, however successful in other re- 
spects, relegates the human factor to the same level as the 
external object, is uneconomic in the broad sense, because, 
instead of subordinating wealth to man, it sacrifices man to 
wealth. A production of wealth which is based upon disre- 
gard of the human rights of the producer is no more truly 
economic than is the defrauding of one party to a bargain 
by the other. There are certain kinds of so-called produc- 
tion which in the highest economic sense no civilized country 
can afford to retain. Slavery at one time nominally enriched 
antiquity, but it brutalized the slave and enervated the slave- 
holder, until it dried up the sources of production itself. 
Child labor at the beginning of the nineteenth century helped 
to swell the profits of the English factory owner, but was fast 
incapacitating the population, physically as well as mentally 
and morally. If the Devil must be a partner in our cotton 
factories, said Carlyle, we cannot afford to have the cotton 
factories. And in saying this he uttered a truth which was 
no less important in its economic than in its moral aspects. 



CHAPTER XIX 
LABOR 

123. References 

F. A. Walker, The Wages Question (1876), chs. ii-iv,'and Political Econ- 
omy (1888), part 2, ch. ii; A. Philip, The Function of Labor in the Pro- 
duction of Wealth (1890); A. Marshall, Principles (1910), bk. iv, chs. v, 
vi; J. S. Nicholson, Principles (1893), bk. i, chs. v, vii; F, A. Fetter, 
Principles (191 5), part 3; R. Mayo-Smith, Statistics and Economics 
(1899), ch. iii; K. Marx, Capital (trans, by Aveling, 1887), chs. xiii-xiv; 
W. S. Jevons, Theory (191 1), ch. v; J. A. Hobson, Evolution of Modern 
Capitalism (191 2), ch. x; Lord Leverhulme, The Six Hours Day 
(1919); S, and B. Webb, Industrial Democracy (1904), part 2, ch. vi; 
L. Brentano (trans, by Arnold), Hours and Wages in Relation to Pro- 
duction (1894); J. Schoenhof, The Economy of High Wages (1892); 
E. S. Meade, Trust Finance (1903), ch. iv; Thirteenth Annual Report of 
the Commissioner of Labor on Hand and Machine Labor (1899); U. S. 
Twelfth Census, VII, Manufactures, part i; F. W. Taussig, Principles 
(191 1), ch. iii. , 

124. Meaning of Labor 

By labor is meant the putting forth of human exertion. The 
attempt to divide it into the categories of physical and mental 
labor is not strictly accurate. The labor of even the most un- 
skilled workman calls for the exercise of certain mental quali- 
ties, like attention, memory and prudence; while on the other 
hand the intellectual effort of the great captain of industry is 
associated with the expenditure of a certain amount of waste 
of tissue. From the lowest to the highest is a difference in de- 
gree. Ordinary day laborers disclose almost endless varieties of 
ability, skill and technical efficiency, the result of the education 
of hand and brain; among the employers the differences in 
capacity and energy are no less marked. Labor runs through 
the whole gamut, from worthlessness to highest efficiency, from 
the mere mechanical repetition of the simplest act to the 



§ 125] Cost of Labor 289 

planning of the most subtle and elaborate business scheme 
or intellectual result. 

Under present social conditions we distinguish between 
laborers and capitalists, between workmen and employers. As 
a rough classification available for many practical purposes, 
this is defensible. From the point of view of production, how- 
ever, it is not wholly adequate. Labor is undoubtedly different 
from capital, but the owner of capital may also labor. The 
employer is not the same as the employee, but he may work as 
hard and his contribution to the value of the product may 
be even more important. It is hence a fateful error to con- 
fine the term labor, as virtually do the socialists, to manual 
labor, and to maintain that all wealth is created by labor, with 
the implication that all other shares in distribution are a de- 
falcation from wages and therefore a robbery of the workman. 
Entirely apart from the fact that there are other factors of pro- 
duction, the contention overlooks the labor of organization and 
enterprise, of correlating the scattered elements of produc- 
tion and of adjusting the supply to the varied demands of a 
complex market. Such labor has become under prevalent 
conditions of even greater value to society than the mere 
manipulation of the tools. A modern railway president or 
head of a great industrial trust often receives a salary equal to 
that of several hundred of his workmen, and larger than that of 
the President of the United States. The work may not be so 
irksome as that of the day laborer, but it may be worth far 
more to society, because its contribution to the product is so 
much greater. The real value of labor depends not upon the 
conditions of employment but upon the results of activity. 

125. Cost of Labor 

Economic production implies the turning out of the greatest 

product with the least cost. So far as the wages of labor form 

an element of cost, it would seem to follow that low wages or 

cheap labor is a necessary condition of low cost. Before ac- 

19 



290 Labor [§ 125 

cepting this ostensibly self-evident proposition, however, it is 
necessary to pursue the analysis further. 

In the first place, we must draw a distinction between the 
individual and the social point of view. Even if it were true 
that in a particular industry low wages denoted low cost, it 
would not follow that it is also true from the point of view of 
society. Since production is conditioned by consumption, 
there can be no permanent increase in output without an in- 
crease in demand. The effective demand, however, depends 
upon the income of the consumers. In any community the 
great mass of the consumers consists of the laborers. The 
lower the level of wages, therefore, the more restricted will be 
the total demand for the national products in general and the 
slighter the chance of reducing cost by expanding the market. 
Low wages which mean low cost in some industries may thus 
indirectly prevent a reduction of cost in other industries. 
Where a particular set of industries is manufacturing almost 
wholly for the foreign market, the effect may not be so obvious; 
but since, as in all international trade, imports must ultimately 
pay for exports, the volume of the foreign trade finally depends 
on the capacity of the domestic consumer to utilize what is 
brought in. Thus even the prosperity of the export industries 
may be purchased at the expense of the other branches of pro- 
duction. Irrespective of the general question of the social 
desirability of high wages for the laborer himself, it is clear 
therefore that when we regard public wealth in general, low 
wages do not necessarily mean low cost. The low cost in 
some industries may be outweighed by the higher cost due 
to the lack of consumption or restricted market in other 
industries. 

In the second place, in any single industry low wages do not 
necessarily mean low cost. The real cost of labor is to be 
measured by its productive efficiency. Just as the hundred- 
thousand-dollar railway president is cheap because an inferior 
and low-priced substitute would botch matters and increase 



§ 125] Cost of Labor 291 

expenses, so in the case of the ordinary wage-earner the real 
cost is to be measured by the ratio of wages to the product of 
labor. In the Philippines the contractors find it in the end 
cheaper to hire the Chinamen in preference to the natives, al- 
though the former command larger wages; in the Southern 
cotton factories the white laborer is found more advantageous 
than the negro factory hand, who can be hired at a materially 
lower wage. Furthermore, in the same industry and with the 
same workmen neither an increase of wages nor a curtailment 
of labor time necessarily augments cost. Where a reduction of 
hours or an increase of wages succeeds in enhancing energy, 
care and sobriety, the output may be greater than before. Es- 
pecially where fine machinery is used and a high grade of 
intelligence is required to secure the best results, we often find 
a true economy in high wages and a lower cost in shorter hours. 
The relatively cheapest goods which are produced in the United 
States and which successfully compete in foreign markets with 
the products of low-priced labor are certain iron and steel manu- 
factures, boots and shoes, clocks and the like, where the wage- 
scale is notoriously the highest. 

Of course it does not follow that every increase of wages 
or reduction of hours will lower cost. There is at every period 
and in every industry a limit beyond which the increase of 
efficiency will be overtaken by the greater outlay, and it is 
quite possible that there may be no increased efficiency at all. 
In such cases higher wages do indeed mean greater cost. The 
mere fact, however, that goods sell at low prices tells us noth- 
ing as to the comparative rate of wages in that industry. The 
cheapness of so-called white goods in a department store may be 
due to the low-priced labor in the sweat-shops; the cheapness 
of a Waltham watch may be compatible with the very highest 
wage-scale. So far as labor is a factor of production, cost de- 
pends not merely upon wages, but upon wages as compared with 
output. Under certain conditions there is a true economy in 
high wages; the more a workman is paid, the less he may cost. 



292 Labor [§ 126 

126. Efficiency of Labor 

Since the ultimate factor in the relation between labor and 
cost is productive efficiency, the problem of increasing the 
efficiency of labor is of paramount importance. The older 
economists were fond of emphasizing the dependence of the 
demand for labor upon capital. While their analysis was in 
many respects valuable, they overlooked the independent power 
of labor to contribute to its own uplifting through an increase 
of efficiency. It is precisely here that the economic effects of 
education and leisure as well as of social and political progress 
mean so much to the community. In the commercial warfare 
that is being waged between nations to-day, education is recog- 
nized as a potent weapon. In the United States the old-time 
prejudice against the college-trained business man has given 
way to the recognition of his superiority; technical and com- 
mercial schools of all grades are being multiplied, and even 
the primary and secondary institutions are adapting their 
curricula more successfully to the needs of the ordinary man. 
The gist of the negro problem in the South is seen by all care- 
ful thinkers to consist in the increase of productive efficiency 
through an appropriate education of the negro. The hope for 
the Filipino is to be found in the possibility of training him 
to habits of orderly and consecutive work. With him, as with 
the laborer at home, the significance of a higher standard of 
life — which is only another way of stating the basis of greater 
productivity — is to be found not only in the domain of dis- 
tribution and consumption but in that of production. The 
finer the tool, the greater will be the product; when the tool 
consists of human energy, we have not only a greater product, 
but a greater capacity in the human being to utilize the product. 
The short-sighted employer to-day is concerned only in secur- 
ing the ostensibly cheapest workman and in driving him to the 
utmost ; the long-sighted employer finds it profitable not only to 
pay fair wages for moderate hours, but to surround his workmen 



§ 127] Advantages of Division 293 

by an environment of cleanliness, comfort and attractiveness, 
with provision for rest, recreation and education. No one who 
attended the St. Louis Exposition in 1904 could have failed to 
be struck by the exhibits of the Westinghouse Company of 
Pittsburg and of the National Cash Register Company of Day- 
ton, with the remarkable arrangements for the welfare of their 
workpeople. Yet it can scarcely be doubted that it is ''good 
business" on the part of the employers, and that all these seem- 
ingly needless and sentimental expenditures really involve a 
lowering of cost of production through enhanced efficiency of 
labor. 

We thus see the close interrelation between production and 
civilization. Not only is a lowering of cost the basic condition 
of increasing wealth and progress, but the physical, moral and 
intellectual advance of society inevitably reacts upon the indi- 
vidual and renders him a more capable and efficient agent of 
production. State and church, science and art, have their 
deep economic significance. Progress is at once a result and 
a cause. The true reduction of labor cost of permanent im- 
portance is that caused by increased efficiency. The more of 
a man a laborer is, the better tool he becomes. Whatever 
society does to improve the individual will be more than re- 
paid by an augmented production of wealth. 

127. Nature and Advantages of Division of Labor 

In the progress of efficiency perhaps the greatest factor has 
been the principle of specialization or division of labor. In 
its deepest aspects it is one side of the biological law discovered 
by von Baer and elaborated by Herbert Spencer, — the growth 
of all life from uniformity to multiformity, from an incoherent 
homogeneity to a coherent heterogeneity. From the economic 
point of view division of labor may be put into four categories, 
— the social, the industrial, the technical and the territorial 
division of labor. 

(i) The earliest illustration of the social division of labor 



294 Labor [§ 127 

is the differentiation of economic function between man and 
woman. In aboriginal society certain kinds of work were 
assigned exclusively to the female. We have seen the influ- 
ence of women's work upon the evolution of the later economic 
stages. Even to-day, when all careers are open to women, 
there is a natural tendency for female labor to concentrate 
itself in those groups where women possess a peculiar efficiency 
and where there is the least possible competition with men. 

Apart from sex cleavage the earliest example of differentiation 
of function was through the formation of social classes. At 
first every one had to fight to secure his food and fight to retain 
what he had secured. The separation of a permanent mili- 
tary class from the industrial group was a great step in the 
efficiency of each; it is not yet found in even so comparatively 
developed a society as that of the American Indian. The 
development of a priestly class, again, although of chief impor- 
tance from the social and religious point of view, had a note- 
worthy economic effect in that it permitted the industrial class 
to devote itself more unremittingly' to the daily tasks of produc- 
tion without giving so much of its time to the independent 
propitiation of the malevolent spirits. The priests were in 
truth a labor-saving device. 

It took ages for the originally homogeneous industrial group 
to split up into great classes. Even after centuries of prog- 
ress the husbandman's family not only worked up the raw 
material into roughly finished products, but exchanged super- 
fluities with their neighbors. The cultivator was a handicrafts- 
man and a trader, as he is still in part to-day on the American 
frontier. An independent class of traders was slowly differ- 
entiated, and with the originally greater importance of extra- 
tribal commerce the traders were usually the aristocrats. It 
is only where economic conditions were inimical to commerce 
and engendered the predominance of a land-owning aristoc- 
racy as in some of the feudal states of mediaeval Europe and 
Japan, that we find a contemptuous attitude toward trade, and 



§ 127] Advantages of Division 295 

especially toward the small trader, who was often at the same 
time a petty craftsman. Finally, the artisans are separated 
ftom both farmers and traders, and we notice the development 
of the industrial class in the narrower sense of the term, as 
distinguished from the agricultural and commercial classes. 
With every step in the progress of society we have a further 
division of labor within each class until we reach the modern 
bewildering complexity of occupations and professions. 

(2) Just as the social division of labor has denoted increased 
efficiency of each group, so within the sub-groups we find the 
second form of division of labor, which may be called industrial 
specialization. In the textile industry, for instance, certain 
mills manufacture only yarns; others do nothing but weave 
yarns into cloth; and still others merely dye and finish the 
product of yarn-spinning and weaving mills. In New England 
there are shoe factories which make only uppers" and others 
which produce nothing but "findings" (counters, shanks and 
heel-stiff eners) . In the glass industry large establishments 
turn out only one kind of bottle. Some branches have even 
become so completely specialized that there are factories, as 
in the bicycle and electrical supply industries, where nothing 
is done but assemble the parts of a machine or instrument 
that are made in other establishments. The advantages of 
this kind of specialization are numerous and obvious. 

(3) Thirdly, we find within each particular business enter- 
prise an increasing separation of industrial functions known 
as the technical division of labor. This is a specialization of 
process within the same establishment rather than a specializa- 
tion in different establishments. It may also be declared to 
be a specialization among workmen in contrast to the indus- 
trial division of labor which is a specialization among employ- 
ers. It is clear that specialization of the workman saves time 
both in preparation for the trade and in execution of the task, 
while the greater familiarity with a single process vastly aug- 
ments his dexterity. It is no less obvious that the greater the 



296 Labor [§ 127 

specialization the greater will be the chance of the right man 
falling into the right place, thus facilitating the adaptation 
of means to end. A trip through any modern factory will 
disclose tens — nay, even hundreds — of separate processes 
designed to turn out a product which in former times was en- 
tirely made by a single individual. A good example of such 
a subdivision of labor, resting still upon human labor force 
alone, is to be found in the manufacture of ready-made coats, 
which is now in New York divided into no less than thirty- 
nine distinct processes.^ 

It is, however, in cases where ample technical auxiliaries are 
used that we find the most minute subdivision of labor. Hu- 
man energy can then be reduced to the repetition of a single 
act like a thrust, a pull, a stroke or some other simple manipu- 
lation of a machine. The reduction of cost often progresses 
in a far greater ratio than the increase in the number of pro- 
cesses, for we have here to deal not only with the enhanced 
dexterity of the workman but with the almost endless suc- 
cession of labor-saving devices. To make a shoe in some New 
England factories requires 173 different operations, each con- 
ducted by a class of laborers with a special name. The manu- 
facture of a fine watch calls for no less than 1,088 different sets 
of workmen (not including the operations of furnishing the 
power), each using a different kind of machine. The saving in 

1 These thirty-nine classes of workmen are: i. Fitter; 2. Pocket- 
maker; 3. Canvas-baster; 4. Lapel-padder; 5. Bar-tacker; 6. Seam- 
presser; 7. Lining-maker; 8. Lining-operator; 9. Sleeve-maker; 10. 
Lining-presser; 11. Sleeve-presser; 12. Collar-padder; 13. Shaper; 
14. Tape-fuller; 15. Lining-baster; 16. Operator; 17. Presser; 18. 
Edge-cutter; 19. Edge-baster; 20. Shoulder-lining baster; 21 Shoul- 
der operator; 22. Edge sleeve-baster; 23. Collar-baster; 24, Sleeve- 
presser; 25. Joiner of collar to lapel; 26. Armhole-baster; 27. Sleeve- 
sewing operator; 28. Garment-examiner; 29 Collar-finisher; 30. Arm- 
hole-lining finisher; 31. Basting-puller; 32. Edge-presser; :^^. Button- 
hole-cutter; 34. Buttonhole-maker; 35. Hanger-sewer; 36. Presser of 
entire coat; 37. Button-marker; 38. Button-sewer; 39. Busheller. 



HAND AND MACHINE LABOR. 

NUMBER OF HOURS WORKED UNDER EACH METHOD IN PRODUCING SELBCTED UNITS. 



DESCRIPTION OF UNIT. 



AGRICULTURE. 
BARLEY 100 bushels. 
CARROTS 10 TONS long orange. 

rnPM 50 BUSHELS, shelled; STALKS, HUSKS, ■ 
UUKIN ^^p BLADES CUT INTO FODDER. 

CORN 50 BUSHELS, HUSKEDJ STALKS LEFT IN FIELD. 

COTTON SEED COTTON, 1,000 POUNDS. 

HAY HARVESTING AND BALING 3 TONS TIMOTHY. 

OATS 160 BUSHELS. 

PEASE 50 BUSHELS. 

POTATOES 500 BUSHELS. 

RICE 10,000 POUNDS ROUGH. 

RYE 100 BUSHELS. 

STRAWBERRIES 500 quarts. 
SWEET POTATOES 50 bushels. 
TOMATOES 100 bushels. 
WHEAT 50 bushels. 

MINING. 
COAL 50 TONS bituminous. 

QUARRYING. 

DRII I INir; GRANITF 60 2l^ INCH HOLES, l!^ FEET 
UKILLlNCa tiKANI I fc. o^Ep^,^ GRANITE ROCK. 

npii I I Mr; Qnru 6 2 inch holes, 12 feet deep, 

UKILLINCjHUOK in hard blue ROCK, 
GRANITE QUARRYING 50 CUBIC FEET. 

LIMESTONE quarrying 100 tons. 
MARBLE quarrying 72 cubic feet. 
RED ROCK quarrying 40 TONS. 

TRANSPORTATION, Etc. 

transferring 6,000 bushels 
LOADING GRAIN wheat from storage bins OR 

ELAVATORS TO VESSEL. 

LOADING ORE loading 100 tons iron ore on cars 

TRANSFERRING 200 TONS FROM 

UNLOADING COAL canal boats to bins 

400 feet distant. 
UNLOADING COTTON transferring 200 bales 

v..iMi_wnL^iixi^ ^wi . ^i>i FROM vessel TO dock. 



year 
produced. 



1829-30 
1895-96 

1850 
1895 
1855 
189i 
1855 
1894 
1841 
1895 

1860 
1894 
1830 
1893 

1856 
1895 
1866 
1895 

1870 

1895 

1847-48 

1894-95 

1871-72 

1894-95 

1868 

1895 

1870 

1895 

1829-30 

1895-96 



1895 
1897 



1897 
1897 
1896 
1896 
1890 
1896 

1866 
1897 
1876 
1896 

1896 
1896 



1853 
1896 
1891 
1896 

1859 
1896 

1860 
1896 



I --Jn-'-^ ^ 



3504 






ll8J91 



NUMBER OF HOURS WORKED. 



HANT 



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HAND AND MACHINE LABOR. 

NUMBER OF HOURS WORKED UNDER EACH METHOD 
IN PRODUCING SELECTED UNITS OF MANUFACTURE. 



DESCRIPTION OF UNIT. 



NUMBER OF HOURS WORKED. 



Hand 

MACHINE 



PITCHFORKS 50 PITCHFORKS. 12 INCH TINES 
PLOW 1 LANDSIDE PLOW, OAK BEAMS AND HANDLES, 
BAGS 5,000 COTTON FLOUR SACKS. 

Rl AMl^Rnni^Q 12 CROWN LEDGERS, 8 "-^X U)^ INCHES, 
Dl_AINt\DUUt\:5 400 PAGES, FULL SHEEP. 

BOOKBINDING 500 12 mo. books. 320 pages, 

Ljv^v./r>.uii>.L^iiNvj FULL CLOTH. 

CWnPC; 1^ PAIRS MEN'S FINE GRADE, CALF, WELT, 
anUCa LAj,g SHOES, SINGLE SOLES, SOFT BOX TOES. 
Qf^ypc 1.000 STRAWBOARD, PAPER-COVERED, 
DWACO SHOE BOXES, 11)4X6 XjX'NCHES. 

CRACKERS 1,000 POUNDS GRAHAM CRACKERS, PACKED. 

_,,__ 200 YARDS INGRAIN CARPET, COTTON WARP, 
CARPET WOOL FILLING, 1088 ENDS, 26 PICKS PER INCH. 

1 ELLIPTIC SPRING, LEATHER TOP BUGGY, 
OAnoiAOr- PIANO BODY, DROPPED AXLES, 
OAKKIAUh BANDED HUBS, CLOTH TRIMMINGS. 

10 GOLD HUNTING WATCH 
\A/A-rr«Lj r•^ccc CASES, 18 SIZE, ENGINE TURNED, 
WAI(-,M '"'Ait.b BARLEYCORN SHEILD PATTERN. 
1 KEY-WIND, BRASS 

WATCH MOVEMENTS "'J^,'I'N<^,,y^.Yn^'^2^^"^^^' 

18 SlZb^ FULL PLATt, 
rnMRC; ■> GROSS HORN DRESSING COMBS, 7 X 1^^ INCHES, 
CUIVlDb COARSE AND FINE TEETH 1>4''lNCHES. 

BARRELS 100 flour barrels, patent hoops. 

ROPE 300 POUNDS 3/INCH HEMP BALING ROPE 

rnpc;PTQ '' dozen medium sateen corsets, 

L-UKit I :3 ^y EYELETS IN BLACK. 

y .^^^P^_ 12 dozen no. 2 SHINGLING HATCHETS, 
l-IA I <^nt:. I S 22 POUNDS PER DOZEN. 
^ (. P 1 DOUBLE BARRELED, BREECH LOADING, 

l-IKtAKMii HAMMERLESS SHOTGUN. 

„.,„„,,, ,_^_ PRINTING AND BINDING 4,000 PAMPHLETS, 

PAMPHLETS 32 PAGES, s^ x 5% inches. 

FOLDING, STITCHING, AND COVERING 2,000 

MAGAZINES copies-96-page magazine, 6/a x 9)^ inches 

NEWSPAPERS PRINTING_AND FOLDING 3.&,000_PAGES. 

I lXur^r-DADUV PRINTING 1,000 SHEETS ART WORK, 
LI I MULaKAKMY ig x 28 INCHES, 6 COLORS. 

TYPESETTING 100,000 ems, newspaper work. 

100 ELECTROTYPE PLATES, 

ELECTROTYPING a/g x 7^ inches. 

nMr-DA\/iMO ^ WOODCUT. ?){ X 9 INCHES, SAME 
hNCjKAVINU PATTERN UNDER EACH METHOD. 

ENVELOPES 50,000 NO. 6^ pl\in white envelopes. 
BUTTER 500 POUNDS, in tubs. 

1 dozen white muslin shirts, PLAITED LINEN 

SHIRTS bosoms, linen covered collars and cuffs 

ATTACHED. 
I r\i PMr^trc ^^ OAK FRAME, ROUND END, PLUSH COVERED 
LUUI\ljt.b LOUNGES, 69 X 23 INCHES, ANTIQUE FINISH. 

,iAr,K,cc-c- 'S^""" DOUBLE COACH HARNESS, 
HAKNtbb TRACES 10 STITCHES PER INCH. 

GRANITE DRESSING 150 SQUARE FEET. 



1836 
1896 

1896 

1870 
1896 
1860 
1896 

1862 
1895 

1865 
1895 
1867 
1895 

1858 
1895 
1860 
1895 

1865 
1895 
1850 
1897 

1862 
1896 
1815 
1895 

1895 
1895 
1875 
1896 
1856 
1896 
1855 
1895 
1889 
1897 

1895 

1862 
1896 

1895 
1895 
1867 
1896 

1895 
1895 
1865 
1895 
1883 
1895 
1855 
1896 
1866 
1897 
1853 
1895 
1860 
1891 
1860 
1895 
1895 
1891 




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59.96 



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34.501 



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From U.S. Labor BuUeluxi*?- 



§ 127] Advantages of Division 297 

cost due to the introduction of machinery can be illustrated in 
the jewelry and iron business; under the machine method 1,020 
gold filigree shells for cuff buttons can be completed in the same 
time as one by the hand method; in the production of screws 
where one man can operate from six to twelve machines the 
ratio of machine to hand product is 4,491 to i. In the historic 
example of pin-making, where a single workman unaided could 
originally turn out only a few pins a day, but where in Adam 
Smith's time his product was five thousand pins a day, the 
daily product per workman is now about fifteen millions of pins, 
complete and stuck in the paper. The tables opposite pages 
296 and 297 will illustrate the contrast between hand and 
machine labor in various occupations in the United States. 
It is obvious that the technical division of labor is dependent 
on the existence of a vast market. The mass production, which 
results from the improvement of technique through division of 
labor, and the substitution of machine for hand methods, is 
profitable only when the demand for a cheap product is so elas- 
tic as to be susceptible of great increase. Division of labor and 
increase of output are thus correlated. Each is in turn the 
result of the other. 

(4) Fourthly, the principle may assume the form of local- 
ization or territorial division of labor. In large cities we find 
the most important wholesale houses in any line of business 
assembled in districts by themselves. In nations we find 
various industries congregated to a large extent in localities 
which possess some peculiar advantages, such as proximity to 
raw materials, water power or markets, favorable climate, cheap 
labor, and supply of capital or credit facilities. In the world 
at large the principle of the territorial or geographical division 
of labor is the chief foundation for the free trade argument. 
By allowing each section to produce that for which it is best 
fitted, we shall manifestly secure the greatest and the cheapest, 
production. In all cases, whether we have social, industrial, 
technical or territorial division of labor, the result is an en- 



298 Labor [§128 

hanced efficiency of labor and a proportionate increase of 

wealth. 

128. Defects of Division of Labor 

While the principle of the division of labor is undoubtedly- 
salutary, there are certain dangers which must not be over- 
looked. Thiese are the risks involved in specialization of any 
kind. A great scientist has been described as one who knows 
something about everything and everything about something. 
Specialization in such cases is illuminating. Many specialists, 
however, know a great deal about some one thing and nothing 
about anything else. Specialization here is narrowing and 
even dangerous, because it tends to prevent a broad power of 
successful generalization. In the economic domain the risk is 
the same. In the social division of labor a particular sub- 
group may pursue its own interests so closely as to subordinate 
to them the public interest, thus preventing an even and well- 
rounded economic development. In the territorial division of 
labor the dependence of a section or country upon one par- 
ticular product may be perilous in time of some suddenly en- 
forced cessation of production, as in the case of the potato 
famine in Ireland in the forties, or it may check progress, as 
in the case of the one-crop system or the sole reliance of a 
country upon agriculture. In the technical division of labor 
the confining of the individual workman to the mechanical repe- 
tition of a simple act may tend to make him a machine rather 
than a man, and to stifle and repress all the powers of initia- 
tive. This is in fact the one great indictment brought against 
the modern industrial system. 

The danger, however, can be averted. In the social division 
of labor a developed sense of social solidarity, of business ethics 
and of political responsibility will insure a continually growing 
adaptation of the parts to the whole. In the geographical 
division of labor a sound industrial and commercial programme 
will, as we shall see, strive for a diversification of industry by 
supplementing, and within certain limits altering, nature. In 



§ 129] Combination of Labor 299 

the technical division of labor the qualities which lie dormant 
during the hours of work may be awakened by a judicious ad- 
mixture of leisure, and by a different attitude toward the work 
itself, which can be brought about in large measure by techni- 
cal and industrial education. If machine industry and division 
of labor simply brought to the workman greater intensity of 
work, as the socialists contend, the result would be disastrous. 
But if, as is often the case, the increased productivity brings 
with it higher wages and shorter hours, the workman's whole 
standard of life may be elevated, and his daily 'task need no 
longer engross the whole of his physical and mental energy. 
Under proper leadership within his own ranks and in those of 
the employers, he may be a part of the machine, and yet not 
only remain a man but become more of a man than before. 
The highest grade of American labor to-day is not the cobbler 
who makes the whole shoe, but the specialist heel-finisher in 
the New England shoe factory. Under such conditions, as 
they are disclosed by progress in the most advanced nations, 
division of labor may be a blessing instead of a curse, and 
remain an aid to production without becoming a menace to 
individuality. This result, however, cannot be reached without 
a struggle to retain the use, while overcoming the misuse, of 
what is an essentially beneficent principle. 

129. Combination of Labor 

Division of labor does not describe the whole of the process. 
To be effective it must be supplemented by the combination 
of labor. This also assumed several forms. 

(i) First, we have the combination or co-operation of labor 
with another agent of production, like capital. We have seen 
that the advantages of the technical division of labor are most 
signal when machinery is employed. Obviously the larger the 
quantity of labor that is saved through the aid of capital, the 
higher will be the productivity of each remaining unit of labor; 
the more complex the entire process, the simpler will be each 



300 Labor [§ 129 

single portion. Without the co-operation of the two factors, 
the division would be less minute and the output less abundant. 
Modern division of labor is largely the result of the applica- 
tion of capital. 

(2) Secondly, we have the technical combination of units 
of labor with each other. This combination may be successive 
or simultaneous. In the so-called team system in the clothing 
industry, for example, although each set of workmen does its 
allotted share, it is most important that they all proceed in 
unison, so that no set completes more or less than can be han- 
dled by the next. Here we have successive combination. In 
a great steel foundry or rolHng mill, on the other hand, each 
detail of the work may be apportioned to a separate class, but 
unless they all co-operate exactly at the critical moment the 
product will be worthless. Here we have simultaneous com- 
bination. In both cases the combination is effective because 
of the division of labor; or, better stated, the result is due to 
the joint influence of combination and division. 

(3) Thirdly, we have the combination due to the fullest 
utilization, from the outside, of the result of each contribution 
to the product. In social division of labor this is brought 
about by the principle of competition or of societary control; 
in territorial division of labor it is produced by the natural 
forces of location; in technical division of labor it is effected 
by the organization of industry. Herein Hes the great role of 
the manager and employer of labor, — the entrepreneur in the 
technical sense. The head of a great department store or of 
a vast factory is akin to a general. He must be at once bold 
and prudent, and must look with one eye to the ranks and 
with the other to the enemy, his competitor. He must be full 
of resources and of foresight. Above all, he must not only 
have an army well disciplined down to the smallest detail, but 
must possess the capacity to take a large view, massing his 
forces at just the time and in just the manner to be most 
effective. In short, thorough organization and co-operation 



§ 130] Supply of Labor 301 

are the secrets of industrial as of military success. The 
great leader is as indispensable in the one career as in the 
other. 

Combination of labor is thus the complement of division of 
labor. The most efficient use of the one involves the employ- 
ment of the other. Specialization and co-operation are the 
obverse and the reverse of the same medal; they are as neces- 
sary to a developed economic life as are the individual and 
social elements to human life, or the centripetal and centrifugal 
forces to all life. 

130. Supply of Labor 

Since labor is a productive agent that is susceptible of in- 
crease, it might seem that the supply of labor will in the long 
run respond to the demand, so that there will never be a de- 
ficiency or a surplus. The situation, however, is by no means 
so simple, even if we confine our attention to ordinary labor, 
and abstract from that for which special education or remark- 
able natural gifts are required. 

In the first place, there may be climatic or racial reasons 
which restrict the supply. In the tropics it is sometimes diffi- 
cult to induce the natives to work for any consideration. Again, 
under conditions of forced labor, the source of supply may 
dry up; the downfall of the Roman empire and the decline 
of prosperity in the South before the war were due to the fact 
that cessation of conquests in the one case and the stoppage 
of the African trade in the other finally made the slave too 
expensive, by limiting the supply. Even under the modern 
system of free labor there may be both artificial and natural 
obstacles. We prohibit Chinese immigration, although by so 
doing we retard the exploitation of the natural resources of 
the Pacific slope. We prefer a more eqiiable, even if slow, 
development to the rapid tempo associated with diminished 
opportunities to the American workman. A less defensible 
restriction of supply is seen in the short-sighted policy of s^ome 



302 Labor [§ 130 

trade-unions which, following the example of the mediaeval 
guilds, seek to secure monopoly returns by interposing all 
manner of obstacles to membership. Such methods, however, 
involve a restriction in the supply of special kinds of labor 
rather than of the general labor force, and invariably react 
upon the workmen outside of the particular unions. Finally, 
a natural obstacle to the free adjustment of the supply is seen 
in the case of the so-called seasonal demand. There are occu- 
pations where labor is needed only at stated intervals, as for 
instance in farming at harvest or vintage time. Yet the laborer 
must live during the whole year. Whenever economic con- 
ditions do not permit a scale of wages sufficiently high to sup- 
port the workman during the intervals of non-employment, we 
find these periodical complaints of scarcity of labor. 

On the other hand, a striking example of the relative over- 
supply of labor is afforded by the substitution of machine for 
hand labor. The introduction of machinery, however, does 
not mean a diminution in ultimate demand. For the decrease 
in cost and price due to machine methods leads to such an 
enhancement of output that even with a relative falling off 
in the number of laborers there will ultimately be an increase 
in the total aggregate of laborers employed. The replacing of 
the stage-coach by the railway finally led to a vast increase of 
laborers at higher wages, coupled with a service at lower cost. 
This result will of course ensue only when the increased profits 
due to the new machinery are saved and invested in new cap- 
ital which gives employment to more laborers. If the profits 
are wasted instead of being saved, a new machinery will be of 
no advantage to the laborer. In point of fact, however, the 
profits are normally saved. The immediate result is often a 
temporary oversupply in the particular trade and the discharge 
of workmen who for the time being, and until they finally 
drift to the new openings, swell the ranks of the unemployed. 
One of the most serious problems of the modern industrial 
system is how to mitigate the evils of this transition period. 



§ i3o] Supply of Labor 303 

In the long run, however, under modern conditions of the 
free play of economic forces the supply of labor will adjust 
itself to the demand through changes in the growth of popu- 
lation. The fundamental point here, however, is the rate of 
remuneration or scale of wages, — a discussion of which must 
be left to the next book. 



CHAPTER XX 
LAND 

131. References 

J. B. Clark, Distribution (1899), ch. xiii, and Essentials of Economic 
Theory (1907), ch. xi; Finch and Baker, Geography of the World's Agri- 
culture (1917); A. Marshall, Principles (1910), bk. iv, chs. ii, iii; H. R. 
Seager, Principles (1913), ch. viii; A. S. Johnson, Rent in Modern Economic 
Theory (1902), ch. ii; R. M. Hurd, Principles of City Land Values (1903); 
M. B. Hammond, The Cotton Industry, part i. The Cotton Culture (1897); 
E. J. Payne, History of America, I (1892), 342, 366-384; U. S. Industrial 
Commission, Report (1902), X, and XIX, 46-123; T. N. Carver, Prin- 
ciples of Rural Economics (191 1); C. R. van Hise, The Conservation of 
Natural Resources in the U. S. (1910); V. G. Simkhovitch, "Hay and 
History" in Political Science Quarterly, vol. xxviii (1913). 

132. Land as a Separate Factor of Production 

Land is generally distinguished from capital as a separate 
factor of production. The distinction, however, is sometimes 
made on insufficient grounds. 

(i) It is claimed, for instance, that land is a gift of nature, 
while capital is a product of labor. It must be remembered, 
however, that economics has to deal with value, and that from 
the point of view of value it is difficult to draw so sharp a line. 
Into many tracts of land there has been put as much labor as 
into equally valuable concrete products. Without the dykes 
of Holland and the irrigation works of arid America the land 
would be worthless. In some garden plots on the European 
continent the tenant on leaving is permitted to take with him 
several inches of soil, — the value of the land is as much or 
as little a product of labor as in the case of other things. It 
may be contended, however, that the value of urban land at 
least is not a product of labor. But how about the value of a 
newspaper, or a banking business? As the country town be- 

304 



§ 132] Land and Production 305 

comes a prosperous city, the newspaper, like the corner plot, 
becomes more valuable, even though the editor works no harder 
than before. The circulation increases through the operation 
of the same social forces which raise the value of the land. 
There may indeed be more newspapers, but there will also be 
more corner plots. Even if we attempt to reduce values to the 
quantities of labor, it is hazardous to distinguish between land 
and capital on this ground: in a diamond drill, which is as- 
suredly a piece of capital, the overwhelming share of the value 
may be ascribable to the raw material or gift of nature, and 
only a small part to labor; in a truck-farm, three-quarters of 
the value of the land may be found in labor and only a quar- 
ter in the gift of nature. In other words, in the value of some 
land, labor plays a large role; and in the value of some capital, 
nature plays a large role. This distinction is hence inadequate. 
(2) Again, it is contended that land is indestructible, while 
capital is perishable. Here, again, the rejoinder may be made 
that the qualities which give value to the land are not inde- 
structible. It is a commonplace that the chemical ingredients 
of the soil need to be constantly renewed. The best agricul- 
tural land may become the worst, and the worst the best, after 
a few generations of exploitation or thrift, as the ca^e may be, 
But surely, it will be said, the qualities of extension or location 
are indestructible. Even here, however, it must be observed 
that the two things are not identical. The mere extension of 
land is indeed indestructible, but it gives no value. All land is 
alike in extension, — the worthless and the valuable. Location 
is extension plus situation, just as fertility is extension plus 
chemical ingredients. Location gives value to land, but loca- 
tion is not indestructible as an economic factor. The land 
may remain, but the value may change because of an alteration 
in its contiguity to a market. The land is still there, but the 
market may disappear, and thus to all intents the economic 
location of the land suffers a change. Any falling off in demand, 
such as a decrease or shifting of population, a change in com- 
20 



306 - Land [§ 132 

merce, an alteration in the conditions of transportation, may 
reduce or wipe out land values. In the deserted mining towns 
of the West the value of the land has vanished, perhaps never 
to return. Value is a product of human relations: nothing 
human is indestructible. 

(3) It is often said that land is fixed in quantity and not 
reproducible. To this the double answer may be made: some 
other things are non-reproducible as well, and in the true eco- 
nomic sense land itself is really not fixed in quantity. Reprodu- 
cibility is a relative term: some things can be easily reproduced ; 
some with difficulty; some, like old coins or works of art, not at 
all. Furthermore the supply of land can be increased both 
actually and relatively. There have always been, and still 
are, vast stretches of unused and worthless land in every coun- 
try and of comparatively worthless land near every city; when- 
ever it becomes profitable, new areas are put under cultivation 
or covered with residences. The striking fact of the past cen- 
tury has been the increase in the supply of arable land and the 
growth of urban areas. Even, however, if all the land in a 
given country or city is occupied, its economic utilization can 
be increased, and that is equivalent to a relative growth of 
supply. More intensive farming in the country or better or 
higher structures in the city have the same effects as an in- 
crease in supply. The limit here, as in all economic goods, is 
the margin of utilization. 

While the differences between land and other things that 
constitute capital are thus differences in degree rather than in 
kind, it remains none the less true that land may usefully be 
put into a separate category. This is due to the fact that an 
increased supply of other things in general involves a dupli- 
cation of the thing itself, while the increased supply of land 
involves a difference in location or fertility. To call this the 
law of diminishing returns is in one sense inexact, since the 
law of diminishing returns is applicable to everything that 
possesses value. The law of diminishing returns, however, has 



§ 132] Land and Production 307 

peculiar consequences when applied to. land. If an employer 
needs more laborers, he can ordinarily secure an increased 
supply at the same wages, even though there is a certain point 
beyond which it does not pay him to employ more. If a manu- 
facturer needs additional machines, he can ordinarily buy them 
at the same price, even though he will buy only up to a cer- 
tain limit. In fact the progress of society means more ma- 
chines or more capital and lower cost. But if more land is 
needed, recourse must be had to less fertile or less well-situ- 
ated land, which normally means a higher cost. The more 
intensive farming or the higher structures referred to in the 
last paragraph amount indeed to an increase in the supply of 
land, but they also involve an increase of cost. 

Economic progress, then, may have different effects on land 
as compared, not indeed with all other things, but with the 
great mass of other production goods. The advance of inven- 
tion and civilization is apt gradually to reduce the prices of 
manufactured articles, but the increase of output and of civi- 
lization may lead to a greater demand for given tracts of land, 
and therefore to an increase in their price. A moderate tax 
on ordinary commodities, reproducible at pleasure, tends to de- 
crease their number and thus to increase their price; a similar 
tax on the value of land is apt to exert no influence on its exist- 
ence, and therefore none in increasing its price. 

While land thus is a part of capital from the point of view 
of the laws which explain the nature of rental value in general, 
and the relation of rental to capital value, land is usefully 
contrasted with capital if we compare changes in land rents 
and values with changes in the great mass of other things, the 
increased production and accumulation of which constitute 
progress. Because of the social significance of such relative 
changes, it is legitimate to put land into a separate category. 



3o8 Land [§ 133 

13J?. Fertility of Land 

Land has value as a factor in production either because it 
yields some concrete produce or because it affords a service as 
the physical support of man. The productivity of land, that 
is, the value of its contribution to wealth, depends in either 
case on two facts, — its fertility and its situation. The fertility 
is a result of the constituents of the soil combined with its 
extension; situation is not simply extension, but geographical 
location. According to the uses to which land is put, we divide 
it into the categories of pasture, agricultural, forests, mineral 
and urban land. Each of these is again divisible: pasture 
land, for instance, into sheep, goat, hog and cattle pasture; 
agricultural land into meadow and plough (or arable) land 
with as many sub-classes as there are varieties of crops; forest 
and mineral lands according to the character of the timber 
or mineral (including under this designation such nonmetallic 
products as coal and oil) ; urban land into business, residential, 
apartment or tenement land. 

So far as the element of fertility is concerned, land, like all 
other forms of wealth, is subject to the law of diminishing 
returns. In agricultural land there is at every moment a max- 
imum return from the application of a given amount of labor 
or capital. As we have seen above (§ 88), the margin beyond 
which the returns begin to diminish may be an intensive or an 
extensive margin. When this margin has been passed, we 
must, in order to secure the same yield, either renew the fer- 
tility of the old plot or select a fresh plot. But the marginal 
point is always definitely ascertainable. In a small and lonely 
New England farm the best results may come from employing 
a laborer for every few acres and not utilizing expensive imple- 
ments; in the far West it may be more profitable to use the 
costliest machines and to economize in human labor; in a 
truck farm the application of rich manures may yield the great- 
est profits. In all cases there is a point beyond which any 



§ 133] Fertility 309 

additional "dose" of capital or labor will give proportionally 
smaller returns. Under normal conditions of progress the 
self-interest of the individual farmer may be relied upon to 
ascertain this point. Under a system of free competition each 
farmer will seek to secure the largest produce from his land, 
and the greater the output, the lower will be the price. The 
private interest of the producer will thus tend to coincide with 
the general interest of the community. This is at once the 
basis and the justification of private property in agricultural 
land. 

In the case of timber land this coincidence between private 
and public interests is by no means so unqualified. In grazing 
land the pasture replenishes itself from season to season; in 
agricultural land the crop follows within a few months, or, as 
in the case of fruit lands, within a few years of the application 
of labor or capital. But in forest land the reproduction of the 
grove takes decades or even centuries. A wise forest policy 
which endeavors to insure a continuous supply to the public 
will therefore content itself with felling only the ripe timber. 
Private interest, on the other hand, which looks to immediate 
gains may derive more profit from the complete clearing of the 
forest. When the woods are practically inexhaustible, as in the 
early period of American civilization, it rriakes but little differ- 
ence. But when the forests are destroyed to such an extent as 
not only to cut off the supply of useful woods but seriously to 
] endanger the equable flow of the streams and to threaten, as 
in Spain, an alternation of complete drought with devastating 
inundations, the situation becomes serious. Timber land here 
can best accomplish the social ends of production through a 
policy which combines the cutting of the mature trees with 
the preservation of the forest itself. It is partly for this 
reason that governments are everywhere retaining or adding 
to their forest lands, as in the United States with its num- 
erous national forest reserves and occasional state parks; 
while some countries even seek to control the action of pri- 



3IO Land [§ 133 

vate forest owners, in the effort to prevent denudation or to 
secure reforestation. 

In mineral lands the possibiHty of reproduction is excluded 
by the very nature of the case. The law of diminishing returns, 
however, is equally operative, even though its working is apt to 
be obscured. In some mines it becomes necessary to go deeper 
for an increased supply, with a resulting rise of cost which 
finally becomes prohibitive and leads to a complete cessation 
of operations. Even where, as in the oil or diamond fields or 
in some coal or iron mines, the returns seem to be constant 
from year to year, we are in the presence of diminishing re- 
turns, for the source of the returns is itself being slowly con- 
sumed. At the end of a given period, be it short or long, not 
only will the returns abruptly stop, but the possibility of secur- 
ing any further yield in the future will also have disappeared. 
As was explained above, we must therefore abstract from each 
recurring return a sum which when capitalized at the rate of 
production will ultimately amount to the total original capital 
and replace the value of the initial stock. Translated into 
ordinary business language, we must allow for depreciation, 
— a depreciation which, when continued long enough, will 
entirely absorb the original capital. The life of the anthra- 
cite coal fields in Pennsylvania, for instance, is estimated, on 
the basis of the present rate of production, at between one and 
two hundred years; and of the English coal fields at some- 
what less. In the case of agricultural land, then, additional 
doses of capital or labor will yield a relatively smaller produce; 
in the case of mines or badly managed forests the ostensible 
produce may be the same, but the real net return on the original 
unimpaired investment becomes constantly smaller. 

Even in the case of urban land the same law applies. The 
fertility, that is, the productive service, of certain lands con- 
sists in yielding support to buildings. It may indeed be profit- 
able to replace a tent by a wooden shanty, a shanty by a stone 
house, and perhaps even a stone house by a steel skyscraper. 



§ 134] Location 311 

Obviously, however, at a given moment there will be a point 
beyond which a more expensive structure will not yield propor- 
tionate returns. 

134. Situation or Geographical Location of Land 

The value of all production goods is derived, as we know, from 
that of the products or consumption goods. Oranges do not 
sell at higher prices than potatoes because the owner must pay 
more for orange lands than for potato lands; on the contrary, 
orange lands cost more than potato lands because the oranges 
that can be grown on an acre sell for a larger sum than the pota- 
toes that can be raised on the same area. Whether the land 
can be used for oranges rather than potatoes often depends as 
much on location as on fertility. The most fertile land may 
be so far removed from the market that, notwithstanding the 
great potential supply of the produce, the land will be value- 
less because there is no effective demand for. its product. The 
mutations in value due to changes in situation are in modern 
times far greater than those due to changes in fertility. The 
fruitfulness of land is subject to the alternations of weather or 
chances of nature, but it may on the whole be kept fairly unim- 
paired with reasonable care, and may be increased up to a 
certain point by unremitting attention. The economic changes 
in situation, on the other hand, are often sudden, long-continued 
and unpredictable. The orange lands in Southern Italy have 
recently been ruined by the rapid introduction of California 
fruit into the Eastern market; the wheat lands of England 
have suffered greatly during the last half-century by the open- 
ing up of vast stretches in the New World. Per contra, when 
the Erie Canal was completed the sections near the terminals 
appreciated enormously, and we have daily examples of the 
sudden rise of value in districts newly served by a railroad. 

These considerations apply to urban land as well. In the 
main, and especially when long periods are taken, the value of 
urban lands grows with the development of the city. Mere 



3 1 2 Land [§ 134 

agglomeration of population does not involve an increase of 
land values, if, as in Naples to-day, the growth of population 
is accompanied by a lessening of business prosperity and there- 
fore by a diminution in the income of the consumer and tenant. 
But where numbers increase with prosperity, land values nat- 
urally rise. The mutations of situation, however, do not al- 
ways result in an advance. Certain sections in Greater New 
York are to-day worth less than a few decades ago, because 
the tide of business or fashion has ebbed rather than flowed. 
The introduction of new trolleys or subways has advanced 
some sites but depreciated others. 

It is largely due to the element of situation that different 
classes of land are within certain limits capable of being trans- 
formed into each other. A diamond field can of course not 
yield a good rice crop, nor can rubber forest land ever be profit- 
ably utilized for oats. But pasture land may become wheat 
land, wheat may be supplanted by garden produce, and truck 
farms in turn may change into cheap suburban sections and 
finally into expensive business sites. From this point of view 
land possesses great mobility. In a certain physical sense land 
is fixed, while everything else is movable, — and this is the 
basis of the legal distinction between movables and immova- 
bles. But in the economic sense land is mobile, and capital 
as opposed to land is immobile. A machine can best be used 
for a particular purpose, and is only rarely serviceable for 
anything else; a piece of land can often serve any one of a 
large number of different uses. Any economic fact which brings 
about a relative change in situation confers mobility upon 
land. 

Since situation is such an important element in productivity, 
all changes which tend to diminish distance by bringing the 
producer and consumer together are a mark of progress. The 
previously existing sources of supply may fall in value, as in 
the case of the New England farms or the ItaHan orange groves, 
but the existing stock of wealth as a whole is increased by the 



§ 135] Cultivation 313 

reduction of cost. It is, however, important to remember that 
so far as the productivity of land is ascribable to situation, its 
rise in value is more and more due to its increasing contribu- 
tion to the production of other things than the mere agricul- 
tural produce. An industrial enterprise is located in a city 
for the same reason as a workman or a lawyer: the greater 
expense of the land for the factory or the home is more than 
offset by the lower costs in other respects or by the expectation 
of higher returns. With the growth of industry and population 
the productivity of land depends more and more on situation 
and relatively less on mere fertility. 

135. Cultivation of Land 

So far as situation is concerned, the increase of productivity 
is solely a result of the progressive elimination of the costs of 
transportation. So far as fertility is concerned, a far larger 
field of activity is open to human ingenuity. The application 
of labor to land is its cultivation. Agricultural products are 
commonly divided into fruits, roots, cereals and leguminous 
plants. Food-roots and cereal grasses are found in a state of 
nature, and their cultivation and improvement play somewhat 
the same role in progress as does the domestication of wild 
animals. There have been several important stages in agri- 
cultural development. 

(i) The first is the system of migratory agriculture or the 
shifting of the arable area. This is found at the outset in all 
countries where land is abundant and where the community 
is on the point of abandoning the hunting or the pastoral life. 
A particular plot is tilled for a season or two in the roughest 
manner^ and when the soil begins to show evidences of de- 
terioration the cultivators abandon the land and pass on to a 
fresh tract, perhaps to return to the first after a long time has 
intervened and restored its primitive fertility. Where the 
land is covered with forests, a clearing is made by fire, the 
ashes fertilizing the ground and the stumps being allowed to 



3 14 Land [§135 

remain and rot. Because of this burning process, the system 
is also called essartage. Where the land is near the seashore 
seaweed, as in the American colonies, is frequently employed 
as fertilizer. 

Migratory agriculture was applied to both roots and cereals. 
Root culture generally precedes that of cereals, and no real 
civilization was ever based on root culture alone. In America, 
for instance, before the advent of the white man, the potato 
and the manioc gave way to maize, and where, as in Hayti, 
this was not the case, there was but slight progress. As Payne 
has pointed out, cereal agriculture alone, among the forms of 
food-production, taxes, recompenses and stimulates labor and 
ingenuity in an equal degree. 

(2) The second stage is that of surface tillage or stationary 
agriculture. As the forests disappear or the supply of free 
land diminishes, the essartage or migratory system gives way 
to the more permanent occupation of a given area, and its 
periodical reduction to a state of tilth. Much of course depends 
on conditions of climate. In the Old World were found wild 
culminiferous grasses which made possible the cultivation of 
wheat, barley, oats, rye, millet and rice. In the New World, 
although other indigenous grains existed, the wild corn or 
maize soon became practically the only cultivated cereal. This, 
together with the fact that no important beasts of burden like 
the ox or the horse are found in historic times, goes far, as was 
remarked above, to explain the lower level of civilization reached 
by the Indians in Mexico or Peru, compared with the natives 
of Asia and Europe. Where the soil is composed of alluvial 
deposits or possesses great fertility for other reasons, the natural 
surface affords so abundant a yield that only very slight manur- 
ing is needed to furnish a practically continuous crop. Sur- 
face tillage may therefore also be called the one-crop system. 
When the land retains its fertility with little labor, and where 
there is a constant demand for the particular product, this one- 
crop system may persist for a long time. 



§ 135] Cultivation 315 

(3) Usually, however, some form of rest is found to im- 
prove the fertility of the land. We thus reach the third stage 
of what is best called alternating agriculture. That is, there 
is an alternation of crop and fallow, the same piece of land 
being cultivated one year, serving as a rough pasture the foUow-r 
ing year. At any given time, therefore, there are two fields, 
— one for the crop, one lying fallow. This is hence also called 
the two-field system. It was soon ascertained, however, that 
still better results could be attained by extending the alterna- 
tion to the crops as well, and we thus reach the three-field system, 
the same field being devoted the first year to wheat, the second 
to oats, and lying fallow the third year. This system, which 
is found throughout mediaeval Europe is also called the open- 
field or intermixed system, because the land was cultivated in 
narrow strips, each cultivator possessing one or more strips in 
different parts of the field, separated from the other strips not 
by any fence or hedge but only by small ridges or balks. 

(4) The fourth stage is reached when a substitute is found 
for the recurrent fallow or waste. This consists in so increasing 
the number and variety of the crops, and in such a skilful use 
of animal and mineral manures, that the fertility of the soil 
is kept practically constant without any fallow at all. This 
system is known as that of convertible husbandry, or in its still 
more developed stages as that of the rotation of crops or diversi- 
fied farming. It involves the use in turn of cereal and root 
crops, and especially the application of hay and of grasses like 
clover. In England, where the transition took place in the 
eighteenth century, it was also called the system of enclosures, 
because the method of separate strips was abolished, and 
the whole field was now cultivated in the same way, separated 
from the adjoining fields by a hedge or fence. 

The earlier systems of agriculture involve the use of much 
land and of comparatively little idbor. They are hence called 
extensive systems. The greater the effort made to secure 
larger crops by economizing land rather than labor, the nearer 



3 1 6 Land [§ 135 

we approach the system of intensive farming. When it is found 
profitable to economize in labor rather than in land through 
the use of capital in the shape of farm machinery, we reach 
the most modern form of large-scale agriculture, which is 
usually termed capitalistic farming, and which will be dis- 
cussed later. At any given period, however, extensive farming 
may be more economical than intensive farming. 

In the United States we find most of these phases. The 
period of essartage or forest clearing was soon followed by the 
surface tillage or one-crop system, which still prevails over 
a large part of the South. The open-field system, however, 
flourished only in very small sections of the East, because the 
rapid increase in wealth in the North and West rendered prof- 
itable the transition on the one hand to large-scale farming 
and on the other to the more intensive system of crop rota- 
tion. With the advance of prosperity the most effective use of 
the land leads to continual changes. In large sections of the 
East, for instance, the cultivation of cereals, with the possible 
exception of corn, has become unprofitable. The less fertile 
lands have been converted into permanent pasture, and the 
increase in the average fertility of plough and meadow lands 
coupled with the growth of forage crops and the use of the 
silo tends to diminish the relative amount of cultivated land. 
The process of transition culminates in the dairies and market- 
gardening farms of the thickly populated communities. Given 
liberty and intelligence, the farmer may be relied on to choose 
that form of tillage which is most profitable to him and most 
productive to the community. 



CHAPTER XXI 
CAPITAL 

136. References 

J. B. Clark, Distribution (1899), chs. ix-xii, and Essentials of Economic 
Theory (1907), chs. xviii, xx; F. A. Fetter, Principles (1915), ch. xxii; E. 
V. Bohm-Bawerk, Positive Theory of Capital (1891), bk. ii, ch. ii; W. S. 
Jevons, Theory (1888), ch. vii; T. N. Carver, Distribution (1904), ch. vi; 
R, Mayo-Smith, Statistics and Economics (1895), ch. v; F. A. Walker, 
Political Economy (1888), part 2, ch. iii; T. Veblen, Theory of Business 
Enterprise (1904), chs. ii, ix; A. Marshall, Principles (19 10), bk. iv, ch. 
vii; A. T. Hadley, Economics (1896), ch. v; J. S. Nicholson, Principles 
(1893), bk. i, ch. vi, and Machinery and Wages (1892), chs. iv, v; F. W. 
Taussig, Principles (1911), ch. v; H. R. Seager, Principles (1913), ch. 
ix; R. Giffen, Economic Inquiries (1904), part 2; W. P. Trowbridge, 
Report on Power and Machinery Employed in Manufactures (U. S. Tenth 
Census, Extra Volume, 1888), U. S. Twelfth Census, VII; United States 
Industrial Commission, Report, XIX (1902), 514-544. 

137. Kinds of Capital 

We have seen that capital in its broadest sense includes 
everything that has a capital value. The totality of capital 
is equivalent to the totality of wealth. Capital would then 
comprise three great categories: (i) consumption capital, or 
wealth which affords a benefit income, like food, jewels, books 
in the hand of the consumer; (2) lucrative or acquisitive capi- 
tal, that is, any form of wealth including relations like the 
franchise of a corporation or the good-will of a business which 
gives a money income; (3) production capital, or concrete 
goods which are utilized to produce more goods. In treating 
of capital as an agent of production it is with this third aspect 
that we have to deal. From the point of view of progress, 
moreover, this is the important aspect, since the first condition 

317 



3 1 8 Capital [§ 137 

of progress is the increase of the concrete goods that consti- 
tute wealth. 

Capital in this sense can be further classified into land and 
other capital. If capital be regarded as either consumption 
or lucrative capital, there is no need for such a distinction. 
Whether a man enjoys an estate or a painting is immaterial, — 

neither can perhaps be duplicated as consumption capital. 

» 
Whether he applies a fund of a given amount to the purchase 

of a farm or a share of stock is again immaterial, so far as each 
represents so much lucrative capital. But as an agent of pro- 
duction, land, as we have seen, stands in a relation socially so 
peculiar to the producer, and is moreover of such paramount 
importance when compared to any other single category of 
concrete goods, that it is best discussed by itself. 

Capital as an agent of production is sometimes classified as 
fixed and circulating capital. The original distinction of Adam 
Smith was that circulating capital comprised goods from which 
profits could be derived only by their circulating from hand to 
hand, like finished products, while fixed capital was that which,! 
like a house, yielded a revenue without changing hands or 
circulating any further. As a matter of fact, however, the only^ 
kind of capital which circulates indefinitely is money; in other 
cases, as when a product goes direct to the consumer, there 
may be only one change of hands. The great aim of modern 
enterprise, in fact, is to reduce the circulation to the narrow- 
est limits. 

Another way of explaining the distinction is to say that fixed 
capital comprises such things as can be used repeatedly for 
productive purposes without suffering much change; and that 
circulating capital consists of things the single use of which 
would convert them from the category of production goods 
into that of consumption goods. A machine would be fixed 
capital; the leather just before being converted into the shoe 
would be circulating capital. This is virtually the distinction 
between durable and perishable wealth. It is also sometimes 



§ 137] Kinds of Capital 319 

expressed as a distinction between active and passive forms 
of capital, the active capital being the fixed capital which, like 
the machine, makes the impression, the passive capital being 
the circulating capital, which, like the leather, receives the 
impression. This nomenclature is less happy in that it ob- 
scures the fact ,that all forms of productive capital co-operate 
with each other, and in this sense are really active. 

Another classification of capital is that according to the 
uses to which it can be put, as agricultural, commercial, in- 
dustrial and financial capital. 

(i) By agricultural capital, strictly speaking, is meant some- 
thing different from land or landed capital. Agricultural cap- 
ital is not land, but the things applied to the land; land or 
landed capital is the ground itself. When we speak of a man 
putting his capital into land, we mean that he invests in a 
piece of land; when we say that he applies capital to land, 
we mean that he spends his money on better farming tools 
or machines, manures, drains or beasts of burden. In the 
former case we would have land or landed capital; in the latter 
we have agricultural capital. This distinction, however, is fre- 
quently not observed. 

(2) When the concrete pieces of capital take the form of 
ships, docks, warehouses or media of internal commerce, we 
speak of commercial capital. When capital is applied to the 
processes of industry in the narrower sense, we speak of in- 
dustrial capital. From one point of view the same object may 
be regarded in turn as industrial, commercial or agricultural 
capital. A cart may be constructed in a factory and then used 
in the industrial operations of another factory; it may be em- 
ployed by a merchant, and may finally be sold to a farmer for 
use on the farm, serving in turn as industrial, commercial and 
agricultural capital. The characteristic feature of modern life 
is the increasing importance of industrial capital. , 

(3) By financial capital is meant not so much the concrete 
objects as the fund or money embodiment of the agent used 



320 Capital [§138 

in financing or rendering possible economic enterprises. The 
surplus from any economic activity may be stored up in the 
shape of jewelry or of coins; and this surplus wealth is the 
financial capital which may at any moment be devoted to pro- 
ductive enterprise. In modern times the surplus is put not 
only into money, but into all kinds of paper and credit repre- 
sentatives. Financial capital on a large scale has been in turn 
a handmaid to each form of economic activity. In the later 
days of classic Rome financial capital was closely connected 
with land, the slaves being the important form of capital. In 
the developed economy of the Orient, as well as in the later 
middle ages, financial capital was intimately related to com- 
merce; the bankers were the merchant princes. In modern 
times financial capital is more and more associated with in- 
dustry: the "industrials" are fast gaining even on the rail- 
way or banking securities. Modern capital is predominantly 
industrial capital. 

138. Function of Capital 

The aim of all economic activity is to secure a surplus by 
augmenting utilities and diminishing costs. Production affects 
surplus in both ways, — it increases the stock of economic 
goods, or decreases the cost. Sometimes it accomplishes both 
results. Capital as an agent of production is an efficient help 
in this process. 

The productivity of capital consists in the aid which it ren- 
ders in securing the same results with less effort. It is an 
adjunct to human labor, and to that extent lessens labor by 
interposing something between labor and its result. The 
function of capital might therefore be called the roundabout 
method of production. If we need water, we can go to the 
stream each time and bring the water in our hand, or we can 
devote some of our labor to constructing a pump. While we 
are making the pump we are losing time and energy, but when 
it is finished there will soon be an appreciable net saving or 



\ 



§ 138] Function of Capital 321 

surplus of utility over cost. Instead of applying our labor 
directly to the stream we interpose the piece of capital known 
as a pump. The pump not only pays for itself, but leaves a 
surplus, which can now be transmuted into further wealth. 
Capital, then, is productive in the same sense as labor. It is 
not indeed the cause of value any more than labor is the cause 
of value. But when labor brings about an increased net sur- 
plus of utility, we call it productive; and when capital does 
the same, it also is productive. If the pump does not work, 
that is, does not increase the surplus, it will have no value, 
neither rental value nor capital; and since it has no capital 
value it will not form a part of the aggregate of things which 
are represented by the fund of capital. But if it does work, 
that is, if it is really capital, it is productive because it pro- 
duces a net surplus over and above what would have been 
produced by unaided labor. 

The statement that capital works through the roundabout 
method of production is, however, liable to misunderstanding. 
In one sense indeed the interposition of capital lengthens the 
period of production. In former days the cobbler made the 
shoe or the blacksmith the chain, and turned it over almost at 
once to the consumer; nowadays a long period intervenes be- 
tween starting the manufacture of a particular shoe or chain 
and its final delivery to the consumer. The process of the suc- 
cessive combination and division of labor has been brought 
to its highest efficiency by the employment of capital. Capi- 
tal is needed for securing the raw material in large quantities, 
or providing the factory or mill and the machinery, for the pay- 
ment of the various classes of laborers, for the warehousing of 
the product and for its distribution to the retailer. The greater 
the participation of capital, the more roundabout is the process. 

On the other hand, a single process or a definite part of a 
process can obviously be finished far more rapidly by a ma- 
chine. The substitution of capital for labor, that is, the re- 
placement of a hand by a machine, means the cutting down 



322 Capital [§ 135 

of the time of technical production. We thus seem to face 
the dilemma that capital saves time and loses time, and that it 
shortens the period of the particular process and yet lengthens 
the period of the entire process. 

The reconciliation is simple. The individual machine saves 
time, but to create the machine takes time, so that the whole 
process, counting from the beginning, is lengthened. The ma- 
chine is productive because it turns out so much more in quan- 
tity that the value of the entire product soon yields a surplus 
over the expenditure of energy put into the machine. That 
is, from the point of view of aggregate mass production there 
is a saving of time, measured in terms of cost; from the point 
of view of the single product there is a sacrifice of time, which 
is more than offset by the fact that the single product is now| 
only an insignificant unit in the mass. The value of the Unit' 
is a proportionate part of the mass. 

In another sense, finally, the ascription of the roundabout 
process to capital may be reversed. If we regard not the 
particular piece of capital, but the fund of capital in general, 
we may, on the contrary, say that capital brings labor and con- 
sumption together. In a large shoe factory, for instance, it 
takes time to make each shoe; but at any given moment the 
raw material is coming in at one end and the shoe is finished 
at the other end. Formerly the cobbler made one shoe and 
then began on another; now at the same instant shoes are 
begun and shoes are finished. The function of capital as a 
productive fund is therefore really to synchronize labor and 
consumption. The individual pieces of capital separate labor 
and consumption; the fund of capital brings them together. 
They are two aspects of the same thing, just as division of 
labor and combination of labor, seemingly the opposites, are, 
as we know, really two sides of the same process. To give a 
familiar illustration, it is like the reservoir of water used to run 
a mill; the individual drops come in at one end and go out 
at the other, but the water remains at the same level and ex- 



§ 139] Creation and Growth of Capital 323 

erts its force as a mass of united drops. The individual pieces 
of capital form the final enjoyment; capital as a whole per- 
manently invested units them. In one sense capital involves 
a roundabout or individual process; in another sense it im- 
plies the most direct of processes. 

139. Creation and Growth of Capital 

The root idea in the conception of capital is that of a sur- 
plus. In order for anything to have a capital value there must 
be a surplus of inchoate uses. If the fibre in an electric light 
bulb wears out, the bulb possesses no further reserve uses and 
loses its capital value. Again, if we labor simply to provide 
for our fleeting wants and consume all that we produce, there 
remains at the close of each production period no surplus. 
The surplus energy which is transmuted into pieces of capital 
therefore comes ultimately from the decision of the individual 
to postpone present gratifications. If instead of taking the 
water directly from the stream we elect to spend our time in 
constructing a pump, we are creating a piece of capital. The 
only way in which capital can be formed is at bottom by saving, 
by waiting, by forbearing. 

The creation of new capital is therefore the result of pru- 
dence and forethought. The habit of saving, that is, of subor- 
dinating the present to the future, is an essential characteristic 
of progress. Primitive peoples are spendthrift, — they have 
no thought of the morrow and lay by nothing. There is no 
accumulation of capital. Where the provision of immediate 
needs occupies the whole of one's time, there is no opportunity 
of developing those higher qualities that make for civilization. 
The formation of a continually growing surplus involves the 
saving of energy and the liberation of human efforts from the 
pressing needs of mere material existence. The growth of 
capital means the advance of civilization, because it implies 
more efiicient labor, the growth of leisure and the freedom to 
turn attention to the scientific, aesthetic and ethical aims of life. 



324 Capital [§139 

The destruction of capital, as in the later days of the Roman 
empire, spells a decay of civilization, because with the weaken- 
ing of the economic foundation the whole superstructure is 
bound to fall. The growth of capital is in itself indeed not 
sufficient to engender the highest form of civilization, but it is 
a fundamental prerequisite. Not all wealthy communities 
have been civilized in the best sense, but there has never been 
great art, great literature, or great science except when there 
has been an abundance of capital. 

To say that capital is the result of saving or forbearance does 
not necessarily imply any moral approbation of the owner of 
capital. It is for this reason that it is unwise to speak, as many 
do, of abstinence or sacrifice as the cause of capital growth. 
A man who alreadj^ possesses an income large enough to satisfy 
his daily wants, be they great or small, cannot do anything 
else with his surplus except to save it, and thus lead to the for- 
mation of fresh capital. If he is a maniac, he can of course 
physically destroy it or the money represented by it; and if he 
is a fool, he can put the capital to such stupid and unproductive 
uses that it will soon become worthless and disappear as an 
embodiment of value. But unless he wastes capital in these 
crude ways, he cannot help saving. He does not abstain from 
any present gratification, because this capital is a surplus above 
all present gratifications. Abstinence here means abstinence 
from senseless waste; it is a negative, not a positive, merit. 
Nor does he sacrifice anything. As we shall see later in dis- 
cussing the question of interest, the problem is one of marginal 
forbearance, that is, of sacrifice at the margin where he must 
choose between consumption and saving. The richer a man 
is, the more remote is the margin where he will have to decide. 
The saving of one dollar means something very different to a 
millionaire and to a day laborer. The essential point to re- 
member is that capital is a surplus, and that the stock of capital 
can be augmented only by an excess of production over con- 
sumption. The excess can be formed only by forbearance 



§ 139] Creation and Growth of Capital 325 

or postponement, but the forbearance is based on the expecta- 
tion of increased income. There is no ethical merit attach- 
ing to the individual, although the social consequences are 
advantageous. 

It might be objected, finally, that if we buy a railway share or 
a piece of land which doubles in value during the year, there 
is an increase of capital without any waiting. In reality, how- 
ever, the share rises in value because it represents an increased 
earning capacity, owing to the fact that the railway is now 
doing more business, that is, adding more value to the com- 
modities it transports, or, in other words, creating surplus 
wealth. If the corporation elected to waste the surplus by 
squandering it in extravagant salaries or palatial private 
cars there would be no excess available for dividends, and no 
rise in the price of the security. In the same way the in- 
crease in the value of the land means that there are more 
individuals who have accumulated capital and who either need 
the land themselves or employ the other human beings that 
are thus enabled to pay for the use of the land. In every case 
the increase of capital, that is, the creation of fresh capital 
or capital value, implies an increased productivity, or a sur- 
plus somewhere. Whether the individual owner of capital is 
always entitled to the particular surplus is quite another 
question. 

Capital, then, is the available stock of existing wealth. If a 
part of this stock is consumed and not replaced, capital is 
diminished; if it is not only replaced, but so used as to bring 
about an increase, this surplus is the new capital. The only 
way to increase capital is to refram from the waste or immedi- 
ate consumption of product. The greater the existing stock of 
capital, the easier is it for the individual or the community to 
make this election. The increase of capital is therefore in last 
resort due to the growth of intelligence. Where science gives 
an increasing mastery over nature, the problem of production 
through the growth of capital resolves itself into the intelligent 



326 Capital [§ 140 

selection of such things as are wanted by society, that is, to the 
formation of a constantly growing surplus of wealth. 

140. Nature and Influence of Capital 

Capital, as a socially important factor, is to-day, as we have 
seen, industrial capital. Ours is called the capitalist age, not 
because capital was unknown before, but because industry is 
permeated through and through with capitalist qualities. Capi- 
tal on a small scale, consisting of a little surplus, was devoted 
to production almost from the beginning of civilization. Cap- 
ital on a large scale was amassed in the agricultural and com- 
mercial enterprises of antiquity. Under the economic conditions 
which made for slavery and handicrafts, however, there was no 
opportunity to employ capital on a large scale in industry; 
and with the decreasing profitableness of slavery and the 
gradual restriction of the commercial frontier, as in later Rome, 
capital itself began to dwindle until the whole economic and 
political structure collapsed. 

After many centuries, capital was again accumulated, first 
out of the surplus of mediaeval agriculture, and then at a more 
rapid rate out of the profits of the new commerce. The open- 
ing up of the world market in the eighteenth century made 
possible the application of this surplus to industry. From that 
time begins the prodigious increase of capital which charac- 
terizes modern life. Now for the first time the real productive 
force of capital is realized. The surface of the earth is a fixed 
quantity; a commerce based on agriculture and the products 
of hand labor can never transcend certain well-defined bounds. 
But the multiplication of commodities into the value of which 
the raw materials enter as a minor factor is limited only by our 
failure to unlock the mysteries of nature. Modern science, 
modern technique, modern capital, are enabling us to explore 
the innermost recesses of this unknown world and to convert 
it to industrial uses. 

Modern capital is therefore primarily industrial capital, and 



§ i4o] Nature and Influence 327 

since the factory is the type of modern industry, the capitaHst 
system may be called the factory system. There is indeed 
also a capitalist agriculture, but the characteristic features of 
this are borrowed from capitalist industry. Industrial capital 
may be taken as the type. 

The factory system is sometimes called the machine system. 
This is not strictly correct. In a modern chemical factory, for 
instance, there may be few or no machines at all. What must 
always be present, however, in a factory is some form of auto- 
matic action, replacing hand labor, whether that action is due 
to forces of nature operating directly upon raw materials, or 
indirectly through the medium of a machine. For all practi- 
cal purposes, however, the machine may be regarded as the 
type. 

Industrial capital in this sense discloses three characteris- 
tics, — mass production, uniformity and interchangeability. 

(i) Capital becomes profitable only when there is a mass 
production. The supersession of hand by machine labor 
involves such an enormous multiplication of output that the 
product must now be sold en masse. The cotton print will 
ultimately go to the individual consumer, but the factory 
owner must count upon the wholesaler taking his entire prod- 
uct of a day, a week or a season. Even if the factory owner 
retails the goods, as for instance with the Tobacco Trust or 
certain shoe-dealers, he must control enough shops to take his 
whole output. 

(2) Industrial capital implies uniformity of production. 
Hand labor gives free rein to the individuality of the pro- 
ducer; each pair of shoes the cobbler turns out may differ in 
some respect from its predecessor, and may be prized on that 
account. A machine turns out the same thing day after day, 
and the advantages of specialization and co-operation are de- 
rived chiefly from this continual repetition. Things are made 
according to fixed types, forms or standards. Hence there is 
sometimes used the term standardization of industry. What is 



2 8 Capital [§ 140 



meant is the uniformity, — the uniform repetition and pro- 
duction of the same type. Great as has been the ingenuity 
expended in differentiating machinery, the result has been only 
a moderate multiplication of types, but little differentiation of 
the individual products within each type. There are indeed 
different kinds of hats and keys, but one Knox hat is almost 
like another, and one Yale key almost like its thousands of 
fellows. 

(3) Industrial capital also denotes interchangeability. Capi- 
talist division of labor means that all complex products are 
made in minute portions. Through the very fact of uniformity, 
one unit is as good as another of the same class, and may be 
used interchangeably. If some particular thing breaks in a 
bicycle or a locomotive, it can be duplicated at once and at a 
minimum cost. The system of interchangeable parts is 
applied to-day even to such products as vast bridges and co- 
lossal steamers. Interchangeability is a corollary of uniformity 
and of mass production.^ 

The deeper social influence of capital is visible in these 
characteristics. Modern life means greater uniformity. We 
dress alike, we eat alike, we speak alike, we think alike. 
Through capital we are becoming citizens of the world. 
Old prejudices are destroyed at every turn, religious and 
racial antipathies diminish, local and even national boundaries 
are overstepped. Side by side with these advantages appear 
the dangers. The levelling is undoubted, but if not carefully 
guarded against it may become a levelling down instead of 
up. Uniformity is preferable to eccentricity and vagaries, 
but a uniformity of mediocrity is to be deprecated. The real 
hope and strength of the factory system are that industrial 
capital will so reduce cost and increase the surplus of the in- 

^This is explained in all its details in the Tenth Census Report on 
Power and Machinery by Professor Trowbridge, who classifies machine 
tools into those acting by compression, shearing, paring, milling, abrad- 
ing, grinding and sawing. 



§ i4i] Investment of Capital 329 

dividual as to enable him to devote it to the higher ends which 
make for progress. 

141. Investment of Capital 

When we speak of the investment or application of capital, 
we mean in last resort the utilization" of the concrete things 
that constitute capital. These concrete things will be used by 
the alert entrepreneur only as long as they yield the maximum 
returns; whenever something new promises better results, it will 
be forthwith substituted. Perhaps the most striking fact in the 
incipient lawsuit of a few years ago between the great iron- 
masters, Carnegie and Frick, was the revelation of the readi- 
ness with which the former threw into the scrap heap machinery 
almost new, costing millions, as soon as a notable improvement 
had been perfected. This seeming destruction of capital on an 
immense scale was in reality an increase, profitable alike to the 
producer and the public. All physical investment of capital is 
the application of new commodities to replace the old. The old 
need not be actually worn out; it is sufficient that it should 
have lost its relative productivity. 

Under modern business conditions the investment of capital 
is put back a stage, and becomes the financial investment, 
which renders possible the ultimate physical utilization. Cap- 
ital is invested as a fund, to be later transmuted into concrete 
things. Herein lies the significance of the modern corpora- 
tion. Through the medium of corporate securities a fund of 
capital is made mobile and active. The purchase by the 
public of a new industrial security means, if the enterprise is 
honestly and ably financed, that the proceeds will ultimately 
take the shape of plant or working capital, that is, of realized 
earning capacity. The function of the promoter, the banker 
and the underwriting syndicate is at bottom legitimate and 
productive. If the physical investment of capital is desirable, 
the financial machinery through which this end is attained is 
similarly productive. It often requires far more ability to raise 



330 Capital [§141 

the necessary funds at the lowest rate than to turn out the 
finished product at the lowest cost. Both investor and con- 
sumer may in the end derive more benefit from the successful 
financial "deal" than from the best technical operation of the 
industry. The control of modern finance over vast masses of 
capital indeed makes possible its manipulation for illegitimate 
ends on a gigantic scale. But these abuses must not blind us 
to the essentially productive character of the services of the 
financiers as the intermediaries between financial and indus- 
trial capital. 

Since the ownership of the concrete pieces of capital is 
coming more and more to be represented by these corporate 
securities, their character becomes of considerable importance. 
Technically they are divisible into stocks and bonds. The 
share of stock represents legally the proportionate part of the 
corporation which owns the corporate assets. When there 
are no bonds, the stock is entitled to all the profits. Fre- 
quently the stock is divided into preferred and common shares, 
the former sometimes being a cumulative stock, so called 
because if dividends are passed they accumulate and must be 
paid subsequently before the common stock receives anything. 
Opposed to the stock is the bond; the property of the corpora- 
tion is mortgaged to the bondholders, who receive interest on 
the bond until the expiration of the mortgage. If there is any 
default in the interest, the property covered by the mortgage 
can be sold to satisfy the debt. In England, where mortgage 
bonds are unknown, their place is taken by the debenture 
stock, the difference being that the holder has the right, in 
case of default, to reimburse himself by levying upon some 
item of the company's property. Bonds are first, second, 
third or further mortgage bonds according to the priority of 
the lien. Where a rate of interest is contingent upon earnings, 
the bond is an income bond. Sometimes the bonds are con- 
vertible into stock, and hence called convertible bonds. When 
smaller corporations are merged into a larger one or when a 



§ i4i] Investment of Capital 331 

corporation seeks to avoid mortgaging its own property, the 
original bonds are put in trust as collateral, and a new issue is 
made under the name of collateral trust bonds or simply trust 
bonds. Although such an issue is not technically a mortgage 
on the real estate, it is so practically, since a recourse can always 
be had through foreclosure to the underlying mortgage securities. 

In legal theory the stock represents the ownership, and the 
bond a limited interest in the enterprise. In actual fact, under 
recent financial development, where the original cost or outlay 
is often defrayed out of the proceeds of the mortgage indebt- 
edness, the stock has come to represent the speculative interest 
in the venture, while the bond represents the actual proprietor- 
ship. This economic reversal of the legal situation is most 
clearly marked in the railways, but is also visible in ordinary 
industrial enterprises. As a consequence there has frequently 
developed an antagonism of interest, not only between bond- 
holder and stockholder, but also between the main body of 
investors and the directorate. In some states the issue of 
bonds is restricted to a proportion of the stock or of the prop- 
erty, or otherwise limited; in other cases the bondholders are 
given voting power; in still other instances the principle of 
minority representation is introduced to safeguard the interests 
of the stockholders. The English law of 1900 and the recent 
Massachusetts law are perhaps the most advanced examples 
of Anglo-Saxon legislation to protect the varying interests of 
different classes of investors. 

The proper method of managing the investment in vast cor- 
porate enterprises has assumed such importance that it has well- 
nigh become a separate discipline under the name of corporate 
finance. It included such topics as accounting, the issue and 
marketing of securities, the funding policy, the accumulation of 
surplus and reserves, and many more. In a comprehensive 
treatise on economics these would all need explanation. They 
must here be passed over with a mere mention. The influence 
of the proper investment of capital is by no means confined to 



332 Capital [§ 141 

the investor. Primarily indeed he seems to be affected. He 
must, however, be regarded as the channel through which 
society as a whole increases its fund of capital and its resulting 
control of nature. The investor, as opposed to the reckless 
speculator, is as effectively an agent of society as any individual 
producer. The one, like the other, may think that he is pursuing 
his own interest, but he will generally also be subserving the 
common interest. If the producer turns out something that 
the community really wants, he will benefit society as well as 
himself; if the investor exercises sagacity in the application and 
control of his investment, he will tend to save the community 
the risk of misdirected energy and the wastes of failure. 

The proper financial control of the fund of capital is no less 
important than the proper application of the concrete pieces 
of Q3,pital to industry, trade or agriculture. Upon the eco- 
nomic investment of capital, in the broadest sense, depends in 
large measure the prosperity of all classes. 



.** 



CHAPTER XXII 
ENTERPRISE — THE CONCENTRATION OF PRODUCTION 

142. References 

W. S. Stevens, Industrial Combinations and Trusts (1913); W. Z. 
Ripley (ed.), Trusts, Pools and Corporations (1916); J. W. Jenks, The 
Trust Problem (191 7); R. T. Ely, Monopolies and Trusts (191 2); H. 
W. Macrosty, The Trust Movement in British Industry (1907); J. Moody 
The Truth about the Trusts (1904); J. E. Le Rossignol, Monopolies, Past 
and Present (1901); A. Marshall, Principles of Economics (1910), bk. 
iv, chs, X, xi; E. S. Meade, Trust Finance (1903) ch. iii; E. D. Durand, 
The Trust Problem (1915); D. H. MacGregor, Industrial Combinations 
(1906); H. Levy, Monopoly and Competition (191 1); United States 
Industrial Commission, Report, I, II, XVIII, XIX, 595-722; Ida Tarbell, 
History of the Standard Oil Company (2 vols., 1904); H. R. Mussey, 
Combination in the Mining Industry (Columbia Studies, XXIII, 1905); 
M. Jacobstein, The Tobacco Industry in the United States {Ibid., XXVI, 
1907); A. Berglund, The United States Steel Corporation {Ibid., 
XXVII, 1907); G. H. Montague, The Rise and Progress of the Standard 
Oil Company, (1903); W. J. Brown, The Prevention attd Control of 
Monopolies (1914); H. W. Quaintance, Influence of Farm Machinery 
on Production and Labor (1904); Bureau of Corporation Reports on 
the Beef, Petroleum, Tobacco and Steel Industries (1905-19 15); S. S. 
Pluebner, Report [of the Committee on the Merchant Marine and 
Fisheries] on Steamship Agreements and Affiliations in the American 
Foreign and Domestic Trade (1914). 

143. The Meaning of Concentration 

Enterprise is in one sense, as we have seen (§ 121), a spe- 
cies of labor. In reality, however, it has come to mean that 
kind of labor which is carried on independently, instead of for 
a stipulated reward. Strictly speaking, it is not identical with 
management, for the manager of a business may be hired at a 
definite salary. Enterprise is management plus risk; that is, 
it involves the independent conduct of a business, with all the 
chances of profit or loss. We have already discussed the his- 

2>2>3 



334 Enterprise 



144 



torical forms of enterprise (chap. vi). In modern times the 
pre-eminent fact of business enterprise is the tendency to con- 
centration, A study of modern business enterprise thus becomes 
virtually a study of concentration. 

In approaching the problem of concentration, we must 
distinguish between the concentration of wealth, the concen- 
tration of production and the monopoly of production. Con- 
centration of wealth is essentially an individual phenomenon 
in the sense that any one may acquire wealth from independ- 
ent and relatively insignificant sources. A rich landlord may 
own a large number of small tracts; a wealthy capitalist may 
secure his returns from many investments in minor enterprises. 
Concentration of production, on the other hand, means either 
that the units themselves are increasing in size, as in the case 
of larger farms or factories, or that they are combined with 
other units under more or less centralized management, as in 
the case of enterprises technically separate, but subject to the 
same financial control. Where an individual owns the produc- 
tive factors, concentrated production involves concentrated 
wealth; where the business enterprise assumes a corporate 
form, concentrated production is compatible with a diffusion 
of wealth among the security holders. 

Concentration of production, again, is not necessarily a mo- 
nopoly of production. The size of the units may increase, but 
there may still be rivalry between them. Bonanza farms, 
department stores and great corporations, each representing an 
undoubted concentration of production, may yet suffer keen 
competition from their rivals. It is only when concentration 
has reached the stage where a single business enterprise per- 
manently supplies so large a percentage of the entire output 
as to control the price that we can speak of a virtual monopoly. 
In such a case indeed there may be technical competitors, but 
the competition is practically inoperative. 

Concentration of production may be predicated of each of 
the three factors, — labor, land and capital. 



§ 144] Large-Scale Production 335 

(i) The concentration of labor as an independent phe- 
nomenon is not important. After a certain low limit of co- 
operation has been reached the profitableness of an increased 
force of laborers depends on the acquisition of more land or 
the utiHzation of more capital. Not only must wages be ad- 
vanced, but the output must be disposed of. For these and 
similar purposes capital is required. Concentration of labor 
is thus dependent upon concentration of land or of capital. 

(2) Concentration of land varies with the kind of land. In 
grazing and agricultural land, modern economic forces, as we 
shall see (§ 145) are opposed to concentration; so far as it exists, 
it rests upon the application of capital to land. In mineral and 
forest lands, when we observe a tendency toward concentration 
it will often be found that, as in the case of .iron, coal and cop- 
per, the product forms an important raw material for closely 
related industries, and that the land concentration is a result of 
the industrial concentration. Finally, in urban lands, whether 
the sites are owned in large or in small plots has no bearing 
on the price. Thus, while the concentration of land may be 
important in distribution, it is as a factor in production either 
non-existent, insignificant or dependent on that of capital. 

(3) Concentration of production hence resolves itself into 

concentration of capital as the dominating force. Of this 

again, there are two categories, — large-scale production in the 

narrower sense and capitalist consolidation and integration in 

the wider sense. Large-scale production is the result of the 

change in the normal business unit brought about directly by 

modern machinery. Capitalist consolidation and integration 

are the result of the more important changes effected by the 

application of great masses of financial capital to industry and 

commerce in general. Each of these must be considered in 

turn. 

144. Large-Scale Production 

Large-scale production might also be called the concentra- 
tion of employment. It means that the business unit, whether a 



336 Enterprise [§ 144 

manufacturing establishment, a commercial enterprise or a farm, 
employs a large amount of capital, and as a consequence in some 
cases also a large amount of labor or of land. The ordinary ex- 
ample is that of the modern factory contrasted with the shop or 
handicraft system of former times. We find isolated instances 
of large-scale industrial production in earlier ages, but with the 
advent of machinery it has become the type instead of the 
exception. Beginning in the textile industries in England at 
the close of the eighteenth century, it soon spread to the most 
important trades, although there still exist to-day industries in 
which an unequal contest is being waged between the domes- 
tic and the factory systems. On the European continent the 
transition came somewhat later, and in Germany to-day the 
so-called petty industry (Kleinbetrieb) still makes a respectable 
showing. In the United States, although we find a beginning 
of large-scale industry in the textiles after the war of 1812, it 
was not until after 1850 that the transition from the hand 
trades assumed any importance, and not until after the civil 
war that the tendency toward concentration into large estab- 
lishments became very marked. 

The distinction between small-scale and large-scale produc- 
tion is not precisely equivalent to that between hand trades 
and manufactures. The building trades are generally put in 
the former category, and yet they are often conducted on a 
large scale. On the other hand the factory may be a small 
one. Out of 512,254 establishments reported in the Twelfth 
Census, 215,814 represented hand trades. In 32,382 of these 
from 5 to 20 persons and in 7,773 over 20 persons were em- 
ployed. On the other hand, out of 296,440 establishments, 
in about one-seventh (41,687) the proprietor was the only 
workman, and in about one-half of the remainder (125,890) 
the number of employes was under 5. Nevertheless large- 
scale production may be declared to be virtually the result of 
the factory system with its use of machinery, its mass produc- 
tion and its standardization. In most of the hand trades, like 



§ 144] 



Large-Scale Production 



337 



carpentry, plumbing, custom tailoring and custom boot-making, 
we have a small-scale production; while the building trades 
which form the chief exception are nowadays, through the use 
of machinery, the purchase en masse of raw materials, and the 
employment of large capitals and great numbers of workmen, 
in reality more akin to the factory system. While many small 
factories are still being continually started, the tide is setting 
strongly toward an increase in the size of the unit. 

In the United States the maximum number of manufactur- 
ing establishments in many branches was reached in 1870; 
since that time the number has been in some cases actually 
diminished, while in all cases the average capital invested, the 
number of employes and the value of the product per unit 
have steadily risen. The following table illustrates the great 
increase of large-scale production: 



Industries. 


Number of 
Establish- 


Average per Establishment. 


ments. 


Capital. 


Nuijiber of 
Workmen. 


Value of Product. 


1870. 


1900. 


1870. 


1900. 


1870. 


1900. 
133 

65 
214 

67 
40 


1870. 


1 90c. 


Iron and Steel . . 
Agricultural Im- 
plements . . . 
Carpets and Rugs 
Woollen Goods 
Leather 


726 
2,076 

215 

2,891 
7,569 


668 

715 

133 

1,035 

1,306 


$161,523 

16,780 

58,329 

34.184 

8,076 


$858,371 

220,571 
334.205 
120,180 
131,214 


103 

12 

56 

28 

5 


$274,878 

25,080 

101,217 

53.755 

20,774 


$1,203,545 

141.549 
362,349 

114.425 
156,231 



This method of presentation of averages fails to show the real 
significance of the change, as it includes the small as well as the 
large factories. If, however, the number of workmen is taken 
as an evidence of concentration, it appears that a little over 
eight per cent of all the factories reporting employ about 
seventy-five per cent of the total number of workmen. In a 
single iron and steel mill in Ohio there were 7,477 employees; 
in a cotton mill in New Hampshire, 7,268; in an agricultural 
implement factory in Illinois, 6,728; in an electrical supply 
factory in Pennsylvania, 6,318 workmen. Moreover, as ap- 
pears from the preceding table, the investment of capital and 
22 



338 Enterprise [§ 145 

the value of the output increase far more rapidly than the 
number of workmen. According to the census of 1910 a 
little over one per cent of the number of manufacturing estabHsh- 
ments were responsible for 43.8 per cent of the total value of 
products and for 30.5 per cent of all wage earners. 

145. Large-Scale Agriculture 

Where agriculture depends chiefly on the labor of the farmer, 
aided by comparatively primitive implements, the size limit of 
profitable farming is soon reached. In the middle ages, even 
with co-operative or communal farming, the prevalence of the 
three-field system restricted the size of individual strips. In 
more modern times we find either the small plots of the 
European peasant proprietor or the somewhat larger tracts of 
fresher land of the early American farmer. 

Farming on a large scale becomes possible only when capi- 
talist methods are employed. In former times these methods 
were supplied by slavery, as in the latijundia of later repub- 
lican Rome and in the ante-helium plantations in the South. 
The slave, however, was to all intents and purposes a species 
of capital or machinery — even though a human machine. 
When slavery disappeared, a new era of small farms was 
ushered in, and whatever tendency to large-scale farming is 
found to-day is due in great measure to the application of 
industrial capital in the shape of farm machinery and capital- 
ist methods of transportation. 

The home of farm machinery is in the United States. Its 
coming was somewhat later than in the case of the' other more 
important productive enterprises. Whitney's cotton gin and 
Newbold's cast-iron plough were invented at the close of the 
eighteenth century, but it is only since the civil war that farm 
machinery has been used on a large scale. The increase in 
the production of agricultural implements in the United States 
is illustrated by the following figures: 1850, $6,842,611; i860, 
$20,831,904; 1890, $81,271,651; 1910, $146,329,000. 



§ 145] 



Large-Scale Agriculture 



339 



In the large farms of the far West fifty-horse-power traction 
engines are now used to pull at one season a train of great 
ploughs, harrows and press drills for planting, and at another 
immense harvesting-machines, automatic rakers and threshers. 
In the Central states we find check-row planters, riding-ploughs, 
steam corn-huskers and shellers, mowing-machines, potato 
planters and diggers, manure-spreaders, feed-choppers and 
grinders and ditch-digging machines — to mention only a f ev/ 
of the newer implements. The saving of labor, the prodigious 
increase of output and the lessening of cost go far to explain 
the competition of American farm products in the European 
markets, despite the great obstacle of distance. 

The influence of machinery in increasing wages, shortening 
hours of work, lightening the tasks of .women and children and 
raising the general standard of life of the farmer as well as of 
his hands is so universally recognized that it needs no statis- 
tical proof or explanation. What interests us here is its effect 
upon the size of farms. 

It is obvious that considered by itself expensive machinery 
becomes profitable only when applied to large stretches of land. 
This is evident from the following table giving the average 
number of acres of improved land per farm: 





i8so 


,1860 


1870 


1880 


1890 


1900 


1910 


United States .... 


78.0 


79.8 


71.0 


71.0 


78.3 


72.2 


75-2 


New England .... 


66.5 


66.4 


66.4 


63-4 


56.5 


42.4 


38.4 


Middle Atlantic . . 


70.8 


70.3 


69.2 


68.0 


67.4 


63-4 


62.6 


E. North Central 


62.2 


70.2 


72.1 


76.7 


78.1 


71-3 


79.2 


W. North Central 


54-3 


60. 


64.7 


8S-9 


iiS-3 


127.9 


148. 


South Atlantic . . . 


120.9 


115.6 


80.7 


56.1 


55.6 


47-9 


43-6 


E. South Central . 


85.1 


95-5 


65.1 


54-1 


54-5 


44-5 


42.2 


W. South Central. 


69-5 


74.0 


49.4 


59-9 


70.9 


52.7 


61.8 


Mountain 


39-0 


27-3 


41.8 


88.4 


110.5 


82.9 


86.8 


Pacific 


81.2 


^33-3 


218.6 


227.6 


227.6 


132.S 


116. 1 



In the North Central division, the chief home of farm 
machinery, the increase is marked. The average for the whole 



340 



Enterprise 



[§ 145 



country, however, is kept down by the fact that as a general 
rule land values tend to rise with growing prosperity. A given 
capital thus represents a constantly diminishing acreage, and 
it becomes increasingly profitable to apply more labor and 
minor machines to small areas rather than large capital 
and vast machines to great areas. That is, we have a tendency 
to intensive, rather than large-scale, farming. The final con- 
sequence is a resultant between the two forces of growing 
productivity of machinery and increase of land values. 

The table below gives the average acreage of the entire farm: 



Division. 


1850. 


1870. 


1880. 


1890. 


1900. 


1910. 


United States . . . 


202.6 


153-3 


133.7 


136.5 


146.2 


138-1 


New England ) 
Middle Atlantic ) 


112. 6 


104.3 


97-7 


( 104.0 
I 91-7 


107. 1 
92.4 


104.4 
92.4 


South Atlantic . . . 


376.4 


241. 1 


157-4 


133.6 


108.4 


93-3 


East North Central } 








( 104.8 
) 164.8 


102.4 


105.0 


West North Central ( 


143-3 


123.7 


121.9 


189.5 


209.6 


East South Central ) 
West South Central ) 








\ 1205 


89.9 


78.2 


291.0 


194.4 


150.6 


( 179.7 


233-8 


179-3 


Mountain ) 

Pacific ^ • • • - 


694.9 


336.4 


312.9 


( 298.9 
( 337.0 


457-9 
334.8 


324-5 
270.3 



It will be observed that up to 1880 there was a movement 
toward smaller farms. Since 1880, the era of the introduction 
of machinery on a large scale, the forces have about balanced 
each other in the New England, Middle Atlantic and East 
North Central divisions, while in the South Atlantic division 
machines outside of the cotton gin have been found well nigh 
inapplicable, and the old slave plantations have been gradu- 
ally broken up into small farms. In the West North Central 
division not only has the use of machinery increased, but 
the opening up of vast stretches of grazing land contributed 
to increase the average size of the farms. With the growing 
importance of land values the trend in the West has now begun 
to conform to that in the East. In 1910 over 82 per cent of 



§ 146] Consolidation and Integration 341 

all the farms were under 175 acres. The tendency for the 
small farms to increase is shown by the following table of per- 
centage in acres: 





Under lo. 


10-20. 


20-50. 


50-100. 


100-500. 


500-1000. 


1000 and 
over. 


1880 
1890 
1900 

I9I0 


3-5 
3-3 
4-7 

13 


7-1 
5-8 
6.3 

•I 


195 
19.8 
21.9 

22.3 


.5.8 

24.6 

23.8 

22.6 


42-3 
44.0 

39-9 
39-3 


1.9 
1.9 

1.8 

2.0 


0.7 
0.7 
0.8 

0.8 



The same movement is discernible even in the Western and 
North Central divisions, where, notwithstanding a slight increase 
in the largest farms, there has been a considerably greater 
increase in the smaller farms. The conclusion is that large- 
scale production is, even in the United States, far less appli- 
cable to agriculture, than to industry, chiefly because the lower 
cost resulting everywhere from machinery is, in the case of 
agriculture, partly counterbalanced by the increase in land 
values and the consequent changes in cultivation. 

146. Consolidation and Integration of Production 

Side by side with the immediate effects of machinery in 
enlarging the size of the individual business unit, we have the 
broader phenomenon of the capitalistic- combination of produc- 
tion. This is of two kinds: first, the consolidation of like units 
into a larger whole, as in the union of separate shipping lines 
into the International Marine Company; and second, the inte- 
gration of unlike units, as the union of such originally different 
enterprises as mines, transportation companies, factories and 
mills into the United States Steel Corporation. 

Combinations of capital have gone through several phases 
known respectively as agreements, pools and trusts, each being 
further divisible into two or more classes. 

(i) The earliest form is the agreement of independent 
concerns to fix prices. This is the first natural effort to in- 



342 Enterprise [§ 146 

crease profits by restricting competition. It is found almost 
from the beginning of business enterprise. Its obvious weak- 
nesses are the lack of any adequate penalty to prevent under- 
cutting by any one of the parties to the agreement; and the 
inducement which the ensuing high profits hold out to new com- 
petitors. In the American railway business this plan, whether 
in the form of the earlier traffic arrangements or in that of 
the later presidents' agreements, never proved effectual. In gen- 
eral industry its efficacy has proved to be Hmited and doubtful. 

(2) The next step is the agreement to divide the field, 
each enterprise contracting to limit its activity to a particular 
section. This plan also is subject to difficulties, except in cases 
where the first comer possesses undoubted advantages through 
the mere fact of priority. The most familiar examples are the 
American express companies and the French railways, although 
even here there is some competition on the fringe of each 
field. Division of the field, however, is in most cases only a 
stage in the formation of a closer union, as in the so-called 
rival gas or electric light companies. 

(3) The third phase is the pool, or the attempt to restrict 
the output, rather than the price or the field. The pool is so 
named because the receipts are put into a common fund or 
pool, each member of the combination having an allotted per- 
centage of production.! Ordinarily this takes the form of a 
money pool, the excess or deficiency in each case being paid 
in cash. Occasionally, as in some of the railway traffic-pools, 
the output itself is diverted from one member to another. 
When this apportionment is accomphshed by secret favors to 
individuals, like the cattle, hog and oil "eveners," the abuses 
become notorious. Frequently the equilibrium is brought 
about by a fine on the excess production, instead of a technical- 
pooHng of the output or the proceeds. Here, again, the 
temptations covertly or openly to exceed the allotment in 

1 The industrial pool must not be confused with the financial pool, 
used for speculative purposes in the stock exchange. 



§ 146] Consolidation and Integration 343 

order to secure greater immediate profits or to furnish an argu- 
ment for a larger percentage at the next distribution is fre- 
quently too strong to be resisted. To this danger the whisky 
pool, the beam pool and many others succumbed. 

(4) Sometimes the pool combines both features, the fix- 
ing of price as well as of output. Occasionally it goes still 
further and under the name of selling bureau or agency 
constitutes a fourth phase. The selHng bureau not only fixes 
prices and output, but often manages the entire business of 
selling, taking all orders and distributing the respective allot- 
ments to each member. Many of the German Cartellen are of 
this nature, although in some cases they are nothing but ordi- 
nary pools. Of the same character are the Michigan Salt 
Association, originally formed in 1876, and many of the French 
comptoirs or syndicats. The weakness of the pooling arrange- 
ments is not only their instability, but also the fact that, in 
Anglo-Saxon countries . at least, their provisions are unen- 
forceable because repugnant to the common law. 

(5) The fifth stage was reached in 1882 by the formation 
of the Standard Oil Trust, so called because the constituent 
enterprises turned over their business to a board of central 
trustees, receiving in return trust certificates for the shares of 
stock turned over and abandoning to the "trust" the entire 
operation of the business.^ Although the Whisky (1887), the 
Sugar and other trusts rapidly followed, the scheme was soon 
found to conflict with the law. In 1890 the Sugar Trust was 
held to be illegal in New York, and the same fate befell the 
Standard Oil Trust in 1892 in Ohio. As a consequence the 
original trusts were dissolved, and the constituent enterprises 
were now combined in a new and still more effective way. 

(6) The sixth form is called the holding corporation. 
The original members of the combination are first organized 
as corporations, each maintaining its separate existence. A 

1 The industrial trust must not be confused with the trust company, 
any more than the industrial pool with the stock exchange pool. 



344 Enterprise [§ 146 

new central corporation is then formed to buy up or hold the 
stock, or at least a majority interest, of the individual corpora- 
tions. On the basis of the income received from the constit- 
uent companies, the parent corporation issues its securities, and 
while each plant or business is operated as a separate unit, its 
capacity is virtually controlled by the directory of the parent 
company. It is the trust in a new and more effective form, 
preserving the unity of the old, but adding a certain flexibility 
and responsibility. In its original form, something like the 
holding corporation is found in isolated instances in an earlier 
period, as in the case of the Pennsylvania Company in 1870, 
the Bell Telephone Company in 1880, and the Southern Pacific 
Company in 1884. In the early nineties the United States 
Rubber Company and the reconstructed Sugar Trust assumed 
this form. All these, however, were organized under special 
laws in the various states; the general legality of one corpora- 
tion holding the stock of another was first made possible by the 
New Jersey corporation act of 1899. This led to a sudden ac- 
tivity in the formation of new corporations as holding companies. 
Among the first to take advantage of the law were the Amal- 
gamated Copper Company and the Standard Oil Company, 
which in the interval since 1892, after the alleged trust had 
been declared illegal, had continued in a somewhat formless 
but none the less effective consoHdation through a division of 
the shares of the various constituent companies among a few 
individuals, who had been trustees of the old trust. In 1901 
the United States Steel Corporation was formed, followed in 
1902 by the Mercantile Marine Company and the International 
Harvester Company, and in 1904 by the American Tobacco 
Company. The attempt to apply the same method to still 
larger combinations of railways, as in the case of the Northern 
Securities Company in 1901, failed because of special prohibitive 
legislation to which attention will be directed hereafter. 

During the past few decades the progress of consolidation has 
overleaped national boundaries and we are now well within 



§ 147] Combination and Efficiency 345 

the period of international industrial and mercantile combina- 
tions. Owing, however, to the obvious limitations of the 
situation, international consolidations are still in the earlier 
stages of development and have assumed the forms primarily 
of price agreements and of pools. These international pools 
are found not only in the various branches of industry but also 
and more especially in the shipping business. 

147. Combination and Eiiiciency 

Combination of capital, as is obvious from the illustrations 
of the last section, has made itself manifest in four business 
groups: (i) the railroads; (2) the franchise or public-service 
enterprises, including the telegraph, the telephone and the 
so-called municipal monopolies like water, gas and electric 
light, street-railway, heating and conduit companies; (3) the 
trust companies in the narrower sense, the banks and the insur- 
ance companies; (4) the industrial combinations. The first 
three groups are so important in themselves and so clearly 
marked off from the others that they will be more appropri- 
ately discussed hereafter. We shall confine our attention here 
to the industrial combinations. 

The advantages of such combinations from the point of view 
of the producer are obvious. Considerable savings are possible 
through the ability to buy cheaply in large quantities. The 
avoidance of cross freights by locating the establishments at 
different places is often important, especially in the case of 
heavy or bulky articles. The possibility of handling large 
orders by concentrating production at certain points has fre- 
quently turned the scale. The ability to sell in considerable 
quantities, and therefore at a smaller percentage of profit, is 
an added advantage. Great combinations moreover afford 
opportunities for experiments on a large scale which are diffi- 
cult for the small producers. Decided savings are possible in 
reducing advertising and in dispensing with traveling agents 
or salesmen to procure business. Where the combination is a 



346 Enterprise [§ 147 

large one dealing with various branches of production, the 
ability to utilize waste is a pronounced advantage. The benefits 
of division of labor and large-scale production may be multiplied 
by concentrating departments and facilitating standardization 
by devoting each factory or mill to one particular product. 
The larger the concentration, the better are likely to be the 
knowledge and control of credit relations, so as to reduce the 
loss from bad debts. Again, more ample means are afforded 
to secure capacity of the highest order in the management of 
the enterprise. Finally, the wider view which comes from an 
interchange of ideas and a comparison of experimental methods 
in the separate plants is frequently of value. The president 
of the American Tobacco Company a few years ago declared 
this to be the chief benefit of combination. 

The advantages to which we allude, however, must be dis- 
tinctly understood to mean the advantages of production. 
As to how far the benefits of combination are passed over to the 
consuming public in general is a different problem, to be taken 
up later (§ 239). What we are considering here is the relation 
of combination to efficiency of production. 

We must be careful, moreover, not to push the doctrine into 
the ground. There are limits to the advantages of great size. 
The Germans have a proverb that the trees do not grow into 
the sky; so in industry; when a certain point has been reached 
the added efficiency of more units becomes subject to the law 
of diminishing returns. It has been seriously questioned by 
careful railway operators whether this limit of efficiency has 
not been overstepped, or at least approached, when we have 
separate units of twenty or thirty thousand miles in length. 
Even with perfect organization in industry, fundamental prob- 
lems of policy bear some relation to the amount of details; and 
when the size of the organization passes a certain point — 
which of course differs in every case — the machinery of con- 
trol tends to become unwieldy and cumbrous. All this is to 
say that at a certain point of growth the new efficiency is con- 
verted irlo incfficiencv- 



§ 147] Growth of Combination 347 

The concentration of production, however, is so general and 
world-wide a tendency that the increased efhciency of production 
is a quite sufficient explanation of its existence. That there are 
other contributing causes is more than probable, as we shall 
see more fully hereafter (§ 238); but that these other causes 
suffice to explain the facts of combination is unlikely. The ex- 
planation of a world-wide movement must in itself be general 
and such a general explanation is clearly the economy of con- 
centrated production. It is only in recent years that industrial 
capital has become so abundant as to disclose the real advantages 
of concentration. 

According to the census of 1900 there were 185 combina- 
tions, representing 2,040 plants and turning out products to 
the value of $1,667,350,000 a little over 14 per cent of the 
total industrial output of the United States. But since 1900 
the movement has progressed rapidly. In 1900 there were 16 
combinations each with a capital of over $50,000,000 and with 
an aggregate capital of $1,231,000,000. In 1909, as appears 
from the table on page 348, not only were there 30 such combina- 
tions with an aggregate capital three times as great ($4,020,000,- 
000), but a single combination now had a larger capital than 
the 16 combinations, and about one-half as large as all the 
185 combinations in 1900. 

The United States Steel Corporation is such a striking ex- 
ample not only of the consolidation, but of the integration 
of production, that the following figures are appended. The 
assets of this corporation in 1902 were, according to the testi- 
mony of its president in a recent lawsuit,^ as follows: 

Iron and Bessemer ore properties $700,000,000 

Plants, mills, machinery, etc 300,000,000 

Coal and coke fields 100,000,000 

Railroads, ships, etc 80,000,000 

Blast furnaces 48,000,000 

Natural gas fields 20,000,000 

Limestone properties 4,000,000 

Cash and cash assets 148,281,000 

$1,400,281,000 
- Hodge et at. vs. U. S. Steel Corporation. 



348 



Enterprise 



[§147 



By 1908, the assets had grown to 1,746 miUions and on Dec. 31, 
1918 to 1,871 miUions. Contrasted with this integration of 
unHke industries, we have the consoHdation of Hke industries 
shown below. The ten (in 1918 twenty) subsidiary corn- 



Name. 



1. United States Steel Corporation . . 

2. American Tobacco Company . . . 

3. American Smelting & Refining Co. 

4. International Mercantile Marine Co. 

5. Amalgamated Copper Co 

6. International Harvester Co. . . . 

7. Central Leather Co 

8. Lackawanna Steel Co 

9. Pullman Co 

10. Standard Oil Co 

11. United States Rubber Co 

12. Mackay Companies 

13. American Sugar Refining Co. . . . 

14. Corn Products Refining Co. . . . 

15. American Can Co 

16. Colorado Fuel and Iron Co. . . . 

17. Pittsburgh Coal Co 

18. Westinghouse Electric Co 

19. American Woolen Co 

20. Swift & Co 

21. Commonwealth Edison Co. ... 

22. American Car & Foundry Co. . . 

23. Virginia-Carolina Chemical Co. . . 

24. Republic Iron and Steel Co. . . . 

25. Distillers Securities Corporation . . 

26. Dupont de Nemours Powder Co. . 

27. International Paper Co 

28. National Biscuit Co 

29. American Locomotive Co 

30. United Copper Co 



Founded 


Outstanding 


or Reor- 


Stock and 


ganized. 


Bonds, igog. 


1 901 


$1,393,172,000 


1904 


230,569,500 


1905 


177,000,000 


1902 


175,961,200 


1899 


153,880,000 


1902 


120,000,000 


1905 


108,328,002 


1892 


103,901,400 


1867 


100,000,000 


1899 


98,338,300 


1892 


92,198,000 


1903 


91,380,400 


189I 


90,000,000 


1906 


87,118,100 


1901 


82,466,000 


1903 


79,325,500 


1899 


78,880,400 


1902 


73,504,477 


1899 


70,501,100 


1885 


65,000,000 


1907 


60,483,000 


1899 


60,000,000 


1895 


57,984,400 


1899 


57,876,900 


1906 


57,709,941 


1903 


57,281,966 


1898 


54,770,000 


1898 


54,040,500 


I90I 


53,000,000 


1902 


50,000,000 



panics (the Carnegie, the Illinois, and the Lorain Steel Com- 
panies, the American Steel and Wire Company, the National 
and the Shelby Steel Tube Companies, the American Sheet 
Steel, American Tin Plate, American Bridge and Union Steel 
Companies), themselves the results of many consolidations, 



§ 148] Limits of Combination 349 

represented in 1903 86 blast furnaces, 31 Bessemer and open- 
hearth steel works, 57 blooming, slabbing, billet and sheet 
bar mills, 20 rail and plate mills, 251 puddling furnaces, 39 
skelp mills, 59 bar, hoop and cotton tie mills, 11 structural 
shape works, 24 rod mills, 22 wire mills, 447 sheet, black plate 
and tin plate mills, 5 tube mills, 26 bridge and structural plants, 
24 foundries and 16 miscellaneous works. 

148. Limits of Combination 

It is clear that if there were no limit to combination the 
logical result in every industry would be a monopoly of produc- 
tion. As a matter of fact, however, there are two classes of 
limits, artificial and natural. 

The artificial limits are those due to the interference of gov- 
ernment. The entire problem of legislative restrictions on 
combinations will be discussed hereafter (chapter xxxvi). 
Scarcely less important, however, are the natural limits of com- 
bination. Comparatively slight significance indeed is to be at- 
tached to the point discussed in the last paragraph, namely, the 
diminution of efiiciency and economy after the reaching of a cer- 
tain point. For under certain conditions the industry may have 
attained a monopoly long before this limit has been reached. 
The far more effective limit of combination is the persistence 
of competition. In certain branches this limit does not exist, 
and ought not to exist. In the railroad business the objection 
to competition is that it leads to discrimination. In the other 
public-service corporations competition might do more harm 
than good. Competing telephones would be a source of lasting 
confusion to the patrons, competing gas and water companies 
a continual annoyance to the users of the streets. In some 
other branches of industry, monopolistic combination is un- 
desirable but none the less possible. Where the industry is 
concerned with, or based upon, masses of raw material found 
in a state of nature but in limited quantities and in specially 
favored locations, the control of the natural monopoly is apt to 



2 50 Enterprise [§148 

lead to a monopolistic combination of the business. In ordinary 
business, however, where the raw material is itself either a 
manufactured product or procurable under competitive condi- 
tions, the natural Hmits to combination are more obvious. In 
the absence of legal or natural monopoly, whenever profits 
are high enough to tempt competition, new-comers are likely 
to appear. The combination may swallow up the new com- 
petitor, but as long as science remains free, as long as unfair 
competition (§ 238) is prevented and as long as the combination 
does not control the government or the general media of trans- 
portation, the process will repeat itself. The so-called "eco- 
nomic wastes" of competition are a cheap price to pay for its 
many advantages. Thus, while the United States Steel Cor- 
poration is constantly expanding, new competing corporations 
have been growing equally fast or even faster. Instead of a 
single combination, we have in each branch the looser con- 
centration known as the pool, which has to be readjusted when- 
ever a new competitor appears. At the close of 1904, after 
the Lackawanna Steel Corporation decided to make steel rails, 
the percentages of the Steel Rail Association were at once 
changed, and the arbitrator apportioned th,e output among 
the five members, — the United States, the Lackawanna, the 
Pennsylvania, the Cambria and the Maryland Steel companies. 
So in another domain of business, like the great department 
stores in our cities, there is no way of keeping out not only the 
large competitors, but the small competitors as well. Indeed 
the erection of these mammoth stores has not appreciably 
diminished the number of little shops. 

Again, there are whole fields of industry where combination 
is only slightly applicable. In the woollen trades, in the shoe 
factories, in the cotton and silk mills, as well as in numberless 
other industries, the combinations are apt to be short-lived or 
partial. Finally, in the immense domain of agricultural pro- 
duction the possibility of combination . is almost entirely 
eliminated. 



§ 148] Limits of Combination 35 1 

It is clear therefore that combination must not be confused 
with monopoly and that every combination is not necessarily 
on the highroad to monopoly. With the methods designed to 
prevent monopoly we shall deal later (§ 241). What we desire 
to emphasize here is the truth that if factitious advantages are 
removed and no favors or unfair practices are permitted, we 
need have no fear about the growth of combination. For with 
a free and a fair field, the natural limits of combination will dis- 
close themselves, and up to these limits combination will mani- 
fest all those advantages of concentrated production to which 
attention has in this chapter been directed. 



Book III 
Value and Distribution 



CHAPTER XXIII 
PROFITS 

149. References 



J. B. Clark, Distribution (1899), ch. xiii; N. G. Pierson, Principles 
(1902), part I, ch. v; F. W. Taussig, Principles (191 1), chs. xlviii-1: 
A. T. Hadley, Economics (1896), chs. iv, ix; A. Marshall, Principles 
(1910), bk. vi, chs. vi, vii; T. N. Carver, Distribution (1904), ch. vii; 
F. A. Fetter, Principles (1915), part 5; J. S. Nicholson, Principles 
(i 893-1901), bk. ii, ch. xiii, and bk. iv, ch. vi; A. W. Flux, Principles 
(1904), ch. x; Veblen, Theory of Business Enterprise (1904), chs. vi, x; 
H. R. Seager, Principles (1913), chs. xii, xiii; F. B. Hawley, Enterprise 
and the Productive Process (1907); H. C. Emery, Speculation in the Stock 
and Produce Exchange of the United States (1896); E. G. Nourse, The 
Chicago Produce Market (1918); W. Parker, The Paris Bourse and French 
Finance (Columbia Studies, 1920) ; H. Withers, Stocks and Shares (4 imp., 
1917); A. C. Stevens, Futures in the Wheat Market (Quarterly Journal of 
Economics, II, 1888), and The Utility of Speculation (Political Science 
Quarterly, VII, 1892); S. J. Chapman and D. Knoop, Anticipations in 
the Cotton Market (Econ. Jour., XIV, 1904) ; R. Giffen, Stock Exchange 
Securities (1877); A. Crump, Theory of Stock Exchange Speculation (2d 
ed., 1874); Report of the Commissioner of Corporations on Cotton Exchanges 
(3 vols., 1908-1909); H. H. Brace, The Value of Organized Speculation 
(1913) ; H. B. Drury, Scientific Management (1918) : R. F, Hoxie, Scientific 
Management and Labor (191 5). 

150. The Shares in Distribution 

All wealth that is created in society finds its way to the 
final disposition of the individual through certain channels or 
sources of income. This process is called distribution, and 

352 



§ 150] Shares in Distribution 353 

the shares in distribution differ not only in amount but in 
kind. 

Distribution, like production, is a social phenomenon. If 
every one consumed what he individually produced, there would 
be no exchange, no price, no distribution. In production we 
study the creation of the social income; in distribution we 
study its division. In the one case we regard it as the na- 
tional output, in the other as the national dividend. In pro- 
duction we deal with the cost or expense of the factors which 
co-operate to create wealth; in distribution we deal with their 
remuneration. It is clear that the shares in distribution differ 
according to the character of production and the structure of 
economic life. Where, for instance, slavery exists, we cannot 
speak of wages; where the same individuals own the capital 
and do the manual work, we cannot well distinguish between 
profits and wages; where capital is not loaned, interest does 
not emerge. The modern science of economics is, as we have 
learned, due to the efforts to analyze the modern shares in 
distribution. 

The study of distribution is primarily a study of the remu- 
neration of the factors of production. Since each factor con- 
tributes to the common result known as the social income, 
there must be a certain part of the product traceable to each 
factor. There are hence as many shares in distribution as 
there are factors in production. The remuneration of labor is 
called wages. The remuneration of the fund of capital is 
called interest. The remuneration of the concrete things 
that possess a capital value is called rent. Rent is usually 
limited to the return from land; but since other things as well 
as land are rented, it is better, as we shall see, to call the re- 
muneration of land land-rent or ground-rent in contradis- 
tinction to other rents. Finally, the remuneration of the 
entrepreneur, or the man who carries on the enterprise, is 
called profits. Among them, wages, interest or rent, and 
profits exhaust the entire social income. 
23 



354 Profits [§151 

In modern society differentiation of function has proceeded 
to the extent that different classes control different agents of 
production. This separation, however, is not rigid. The same 
man may own land and factories; he may be a workman and a 
stockholder in the same plant, as in the United States Steel 
Corporation; he maybe a farm-laborer and a tenant or a land- 
owner; he may be a money-lender and yet actively engaged 
in industry, commerce or agriculture. In the great mass of 
cases, however, the social class corresponds to a distinct kind 
of income, and in its broadest aspect the social shares in dis- 
tribution correspond to the factors of production. 

151. Ordinary Profits 

Profits are the income from business enterprise. They are 
not necessarily limited to capital. An employment agency or 
an Italian padrone may make profits from directing labor into 
the right channel. A real-estate operator may make profits 
out of selling land. Profits are a result of business enterprise, 
and the entrepreneur may deal in labor, in land, in capital or 
in all three. It is hence inexact to speak only of the profits 
of capital. 

The best method of gaining an insight into the nature of 
profits is to consider, first, ordinary profits. By ordinary profits 
are meant the profits of a regular business that deals in a repe- 
tition of analogous transactions in competition with others. 
The term normal profits that is sometimes employed is less 
satisfactory, because it incorrectly implies that there is such 
a thing as a normal or general rate of profits, as well as because 
it brings to mind the conception of normal value; whereas 
profits are a result of fluctuations in market value and would 
not exist in a state of normal equilibrium. 

Profits are always a surplus. They are the difference between 
the cost of production or acquisition and the selling price. 
They form a differential, however, in a second sense. Profits 
are the surplus of the intramarginal over the marginal pro- 



§ i5i] Ordinary Profits 355 

ducer. At any given time, under competitive conditions, 
market price is the same (p. 235), but cost varies. The ex- 
penses of production are manifold, but may ordinarily be 
classified into cost of raw material, wages, rent, interest on 
the capital borrowed or invested, taxes and miscellaneous out- 
lays like insurance, advertisements and transportation expenses. 
All of these obviously vary from individual to individual. Some 
will display more care in the selection and arrangement of 
their labor force; some will choose a more advantageous situa- 
tion, with a saving in both rent and transportation; some will 
accomplish better results with less capital and economize in 
interest as well as taxes; some will exercise more ingenuity in 
purchasing the raw material or securing a market. At the 
bottom of the scale is the marginal producer, working under 
the least favorable circumstances, and who can nevertheless get 
no more for his goods. With him price equals cost; with the 
others price exceeds cost. The excess of price over cost con- 
stitutes profits. 

It is evident that in the long run profits could not exist in a 
state of normal equilibrium. If there were no change in the 
general conditions affecting value — if, in other words, economic 
forces were in equilibrium and society quiescent in all respects 
save the existence of such a complete mobility of capital and 
labor as is implied in the idea of frictionless competition, — 
there could be no permanent profit to any producer. The 
gross earnings or gross profits would indeed include interest on 
capital invested; for if the business man did not earn interest 
on his capital, he would go out of business and loan his capital 
at the normal rate to some one else. So also the gross earnings 
would suffice to give him a bare compensation for his services, 
for if not he would enter some other employment or become a 
wage-earner. Gross profits must include interest and wages. 
But there would be no net profits, or surplus profits, or profits 
in the real sense of the word. For as soon as a profit appeared 
the entrepreneurs in other fields who were just making ex- 



356 Profits [§151 

penses would at once bid against each other in their effort to 
secure capital and labor, until they would capture their share 
of the market, and the profits would dissipate themselves on 
the one hand in the higher rate paid for the factors of pro- 
duction, and on the other hand in the lower price of the product 
due to the greater supply. What was added in one industry 
would be subtracted from another. In actual life, however, 
there is a continual change, — population varies, wants are 
modified, capital increases, the processes of industry and 
methods of enterprise alter. Competitive profits are due wholly 
to such changes. He who can take advantage of the market 
secures the gain. 

Profits, again are necessarily unstable. They last only as 
long as tjie economic fluctuation or variation from the normal 
condition continues. A new invention is the source of profit 
because it reduces cost; but when the patent expires and 
competition sets in, the influx of new producers will reduce 
the price to the new cost level and the profit will disappear. 
The profits may accrue for a time to individual producers or 
to the whole class of producers. When general demand aug- 
ments or, as in common parlance, when times are good and 
sales brisk, every one may make money. The increased 
profits, however, will lead to greater production, and the rela- 
tion between consumption and production will soon change, 
so as to usher in the ''bad times" and a disappearance of 
profits. This rhythmic succession of inflation and depression 
will be studied later. Here it is desired to call attention to 
the fact that profits can last only as long as the economic dis- 
harmony or perturbation lasts, that is, as long as the forces are 
not in equilibrium. If the manufacturer continually introduces 
new inventions, he may retain his superiority over his compet- 
itors. If the demand of the community grows by leaps and 
bounds, it may keep ahead of the new production and for a 
long period afford profits to all producers. This may be true 
of a particular commodity or of a whole group of enterprises. 



§ i5i] Ordinary Profits 357 

At one period in the United States the shipping trade was 
particularly remunerative, at another the railroad industry, and 
so on. In a new section the supply of capital and labor may 
be so scarce that all business is lucrative; and the increase in 
population may cause agricultural profits to grow and land 
Values hence to rise. In an old country the general political 
and commercial relations may be such as to afford a growing 
foreign market, with the possibility of large and long-continued 
profits to the domestic producer. In every case, however, as 
soon as the original force has spent itself and competition has 
set in, the profit tends to vanish. 

In this sense, and in this sense only, is it true that profits 
tend either to an equality or to a minimum. The older writers 
confused interest with profit. Interest is the return from the 
fund of capital; profits are the return from the conduct of 
business enterprise, irrespective of whether the enterprise deals 
with capital or labor or both. Interest is a part of cost; 
profit is a surplus above cost. Interest, as we shall see, has a 
normal rate; profits may have an average rate but no normal 
rate. The marginal producer earns no profits; the intra- 
marginal producers make profits which vary with the discrep- 
ancy of their cost from the market price. If in any businesses 
indeed profits are particularly high, the more efficient pro- 
ducers in other lines will transfer their capital to these occupa- 
tions; but in these occupations, as in the others, the competitive 
profits will range from zero to large figures. If there is any 
equality, it is an equality of an average between much and 
nothing. On the other hand, while the tendency to an equal- 
ity is true of average profits — which is of importance only as 
between occupations — the tendency of profits to a minimum 
is true of each particular occupation. There is under normal 
conditions of progress a tendency in the rate of interest to fall, 
but, as we^fehall see, never to vanish; there is under competi- 
tive conditions always a tendency for the rate of profits in 
each individual business to disappear. 



358 Profits [§152 

Thus in ordinary enterprises profit is the great lure of 
energy, and competition the great destroyer of profit. Com- 
petitive profits, the union of both, are hence the symptom of 
progress. They can exist only by being continually renewed; 
they are not a tax on the community, but a draft on nature. 
Profits are a result of price, not a cause of price. Production 
at a lower cost creates profits; competition forces price down 
to lower cost and eliminates profits. Profits can be main- 
tained only by the creation of a continually newer cost level 
lower than the new price. 

152. Aleatory Profits 

Profits are sometimes described as the wages of superin- 
tendence. There are indeed certain occupations where the 
income partakes of the nature of wages. The commissions of 
a broker, like the fees of a professional man, are really wages, 
even though they are popularly called profits. Wages, how- 
ever, differ from profits in that wages are a stipulated income 
and profits a residual income. There is a normal rate of 
wages, there is no normal rate of profits. Wages are a part of 
cost, profits a surplus over cost. The entrepreneur may think 
that he deserves a return for his services, but whether he 
secures one depends on his competitors. There is always a 
certain level below which wages cannot fall, because no work 
would otherwise be done; but the very continuance of com- 
petitive profits depends on the abler producer cutting down 
cost to the point where the marginal producer earns no profits. 
The reduction of some wages to zero implies the starvation of 
the laborer and the crippling of the productive force of the 
community; the reduction of some profits to zero means the 
elimination of the inefficient and the continuance of progress. 
Above all, profits differ from wages in that profits are the direct 
result of price fluctuations. The question thus aris«B as to the 
dependence of profits upon chance. 

Aleatory or chance profits exist in varying degree. Some 



§ 152] Aleatory Profits 359 

are essentially unique or sporadic. If I find a pocket-book on 
the street or receive a bequest, the income is wholly aleatory. 
The law of chance governing all such pure windfalls may be 
of interest to the mathematician, but is of little importance 
to the economist. The hne between aleatory and ordinary 
profits is, however, not so easy to draw. In the first place, we 
have the great field of speculative profits, to be discussed in a 
moment. Secondly, there is an element of luck in all business. 
The oscillations of demand and supply are infrequently influ- 
enced by accident. A flood, an invention, a war, a new whim 
in fashion, a chance occurrence of any kind, may affect the 
individual or the group, the producer or the consumer, and by 
influencing either cost or price modify business profits. In 
one sense all price fluctuations are accidental. 

A distinction is sometimes drawn between industrial and 
pecuniary profits. By industrial profits in the broad sense are 
meant profits derived from the production and sale of repro- 
ducible goods, such as compose the great mass of the annual 
output of wealth. "Industrial" in this sense would include 
agricultural and commercial profits. Pecuniary profits, on the 
other hand, comprise the results of such transactions as have 
to deal only secondarily with production and primarily with 
sale, not from producer to consumer, but from one owner to 
another. The chief example of such pecuniary profits nowa- 
days is the dealing in vast masses of vendible capital, irrespec- 
tive of its industrial uses. Many of the large fortunes of 
recent times have been derived from such sporadic or fortui- 
tous profits. When financiers trade in railway securities or 
"industrial" stocks, their profits on each isolated transaction 
may be independent of, or even opposed to, the best manage- 
ment of the corporation as reflected in higher quotations; for 
their profits may come from buying at lower, rather than sell- 
ing at higher, prices. But even here, with all the abuses of 
which the practices are susceptible, the permanence of pecu- 
niary profits as a whole is ultimately connected with industrial 



360 Profits [§153 

progress. If stocks go down, the profits of some must be 
counterbalanced by the losses of others; but if stocks go up, 
every one may participate in the gain, and even if there are 
some losses they may be more than compensated by the profits 
of others. Stocks, however, can rise permanently only if the 
enterprise earns more, that is, if it is industrially more efficient. 
Thus, while pecuniary profits may in individual cases be the 
result of a change in ownership, with no assignable relation to 
the production or utilization of the commodities which the 
securities represent, pecuniary profits as a whole have, in last 
instance, a real connection with the industrial profits on which 
they finally rest. 

Chance or luck, therefore, may often be the cause of sporadic 
profits, but cannot explain their persistence either for the in- 
dividual or for society. The individual who attempts to secure 
pecuniary profits can in the long run succeed only if he uses 
good judgment, foresight and practical sagacity, thus elimi- 
nating more and more the influence of blind chance. The 
financier, like the manufacturer or merchant, is really a servant 
of society; like some servants, he may be refractory, unfaith- 
ful or treacherous, but in the main he will fare best when he 
best subserves the interests of society. The aleatory element 
is inseparable from profits, since profits are derived from 
fluctuations; but the ultimate cause of persistent profits is the 
ability of the individual to take advantage of the fluctuation, — 
and in the long run this ability plays into the hands of society 

at large. 

153. Speculative Profits — Nature 

By speculation is meant the purchase or sale of anything in 
the hope of profit from an anticipated change in its price. It 
differs from ordinary trade only in degree, for all profit, as we 
have seen, has an aleatory element. The difference, however, 
consists in the fact that speculation concentrates and intensi- 
fies the forces which affect demand and supply. 

Speculation was in former times chiefly place speculation. 



§153] * Speculative Profits 361 

The practice of buying in one market and selling at almost 
the same time in another has been lessened by the modern 
means of transportation and communication, whereby price 
fluctuations between places have been minimized. It exists 
to-day chiefly in the form of "arbitrage" of stock or com- 
mission brokers, and its success depends on the rapidity with 
which their telegraphic facilities may enable them to anticipate 
the published quotations on the exchanges. The more im- 
portant form at present is time speculation based on price 
fluctuations after the lapse of an interval of time. 

Speculation, again, may be sporadic or regular. Sporadic 
speculation is almost as old as business itself. It is the result 
either of a popular frenzy or of a deliberate scheme to take 
advantage of a temporary occurrence. An example of the 
first kind is the tulip mania in seventeenth-century Holland, 
when the most fabulous profits were made by those who had 
anticipated the short-lived demand for bulbs. So also the 
occasional speculative "booms" in real estate at present are 
the cause of enormous profits, followed by corresponding 
losses when the bubble is pricked. In such cases speculation 
is due to changes in demand, which it is almost impossible for 
individuals to foresee or to control. Supply, on the other 
hand, lends itself more readily to manipulation, and deliberate 
attempts are not infrequently made to accomplish this end. 
From the efforts of Joseph to buy up the corn crop in Egypt^ 
and from the decision of the Greek philosopher to show his 
practical wisdom by purchasing in advance of the vintage all 
the winepresses, down to the modern pools and rings, attempts 
to corner the market are occasionally found. While sometimes 
successful in minor cases, they commonly fail when on a large 
scale. The failure is due (a) to the immensity of the capi- 
tal required, (b) to the difficulty of procuring and retaining 
trusty confederates whose selfish interests may often be best 
subserved by selling when their principal is buying, (c) to 
the fact that rising prices will bring to the market all the 



362 Profits • [§ 153 

reserved stock, and {d) to the danger of the substitution by 
the consumer of some cheaper commodity. Thus, while the 
successful corner in Harlem stock in 1863 laid the foundation 
of the Vanderbilt fortunes, the three most picturesque and 
gigantic attempts of the last two decades — the Chicago Leiter 
corner in wheat, the Paris Secretan corner in copper and the 
New York Sully corner in cotton — have all been failures, 
resulting in the ruin of the speculators. 

Both classes of sporadic speculation are in the end socially 
disadvantageous, because the speculative price is driven far 
above or below the true value, with resulting losses in the 
process of restoring the equilibrium. The inordinately high 
cotton prices, due to the speculative attempts of 1904, well- 
nigh produced a crisis in the cotton industry in England and 
New England, and while the Southern planters temporarily 
benefited, the high profits led to such an increased acreage 
during the next season that the price fell below the cost of 
production. A moderately remunerative price would have 
been preferable to these sudden alternations of large profits 
and extreme losses. 

It would, however, be a mistake to assume that all speculation 
is of this character. Speculation could never have become a 
part of the normal business life of modern times if it had sim- 
ply these defects and anti-social characteristics. The modern 
stock and produce exchanges have a definite economic function 
to perform. 

Speculation occurs in securities or commodities. The qual- 
ities which render a commodity peculiarly fit for regular specu- 
lative dealings are three in number: {a) it must be a staple, 
with a large and regular production; {h) it must be homo- 
geneous in quality, so that any unit will be as acceptable as 
another; {c) it must be capable of ready definition and measure- 
ment. Accordingly we find exchanges devoted to cereals, like 
Ivheat, rye, barley, corn and oats, to coffee and sugar, to cotton 
and tobacco, to iron and tin. In the case of securities all those 



§ 153] speculative Profits 363 

qualities are obviously present. The chief transactions on both 
the stock and produce exchanges may be summarized as 
follows: 

If the prices in the estimation of the speculator are high but 
tend downward, he will ''sell short," that is, engage to deliver 
at a future time goods not yet in his possession. If, when the 
time arrives, he can purchase at the anticipated lower price, 
the difference constitutes his profits. Or the same result can 
be reached by a "covering" contract, so called because he 
covers the short sale by making a purchase at a somewhat 
lower price deliverable at the same time. On the other hand, if 
prices are low but in his estimation tend upward, he will "buy 
long," that is, buy more than he would care to take at present; 
and when the goods are finally delivered he can sell at a profit. 
Or, as in the preceding case, he can at once make a "realizing" 
or "liquidating" sale at a higher price, deliverable at the same 
time. Because the "shorts" speculate for a fall, they are 
called bears (who pull down); while the "longs," who specu- 
late for a rise, are called bulls (who toss up). When a sub- 
stantial interval of time elapses between the two parts of the 
transaction, it is called a "future." Cotton futures, for in- 
stance, are dealt in months before the transaction is closed. 
June deliveries may be sold in January. Where the delivery 
is to take place at once, that is, on the spot or in the imme- 
diate future, we speak of "spot" cotton or wheat. 

On the stock exchange most of the deliveries take place on 
the following day, although, as in New York, the option of deliv- 
ery is sometimes three, sometimes thirty or sixty days. Apart 
from the mere gains in daily speculation through "scalping," 
the profits on the stock exchange are realized chiefly through 
loans. If the "short," for instance, is not ready to buy in 
the stocks when delivery is due, he arranges to borrow them, 
expecting to liquidate his loan by a future purchase at lower 
prices. Vice versa, the "long" purchaser who is not ready to 
sell arranges with a broker to "carry" the stocks for him until 



364 Profits [§ 154 

such time as he can sell at a profit. The broker protects 
himself against any possible fall in price by requiring the cus- 
tomer to put up a margin in cash, which differs with the price 
fluctuations. In the produce exchange it is the practice to 
deposit with some constituted authority the margin or sum 
sufficient to secure the other party from loss in case of failure 
to fulfil the contract for future delivery. Such transactions 
are therefore called speculating on a margin. In practice it is 
impossible to distinguish between margin dealings where there 
is no delivery and those where actual delivery is made or 
contemplated, since the difference depends on the shifting in- 
tention of the speculator, and since in every contract actual 
delivery of the stock or produce can legally be called for. 
Finally, speculation takes the form of privileges. A ''put" is 
the privilege to put or deliver to the other party at a definite 
time the security or commodity at a fixed price. A "call" is 
the privilege to call or demand from the other party at a defi- 
nite time the security or commodity at a fixed price. Puts 
and calls may be bought or sold; when a speculator acquires 
the right of electing whether to put or call the stock the privilege 
is called a "spread" or "straddle." Prices of such privileges 
depend on the nature of the market, the nature of the security, 
the length of time the privilege has to run and the difference of 
the stipulated from the present market price. 

154. Speculative Profits — Function 

The chief economic function of regular speculation consists in 
the assumption of risk and results in the equalization of price. 

First, as to the assumption of risk. When, under the stress 
of modern capitalism, dealings in commodities became national 
and even international, the perturbations affecting market values 
grew to be so vast and so numerous that ordinary business 
was seriously compromised by the violent fluctuations in the 
price of the raw materials of industry. The manufacturer 
who bought his materials in the international market expected 



§ 154] Speculative Profits 365 

indeed a profit on the production of the finished article, but 
was unwilling to have this profit turned into loss by sudden 
changes in the price of the raw material. It was to secure an 
escape from the risks of such oscillations that a special class 
arose which assumed this risk and by concentrated attention 
derived a profit from the price fluctuations. 

The first way in which risk is minimized for the ordinary 
business man and assumed by a regular speculative class is 
through the provision of a continuous open market. A cotton- 
spinner, for instance, accepts an order for goods to be delivered 
in a year, and expects to begin spinning in six months. Unless 
he is able to buy now the cotton to be delivered then, he will 
be at the mercy of the chance variations in the cotton market, 
and although he may be the most capable of business men 
his entire profit may be wiped out by a rise in the price of 
cotton. The cotton future enables him to eliminate this risk. 
The same is true of futures in wheat or other commodities. 
It applies equally to the stock exchange. If a railway or 
other industry, in launching a new enterprise, had to depend 
on the chance investors at the time of the issue of the securi- 
ties, it would be seriously hampered. The mere knowledge 
that at any moment there will be a ready sale on the exchange 
greatly increases the circle of purchasers, many of whom may 
not intend to be permanent investors. The stock exchange 
aids the investment of capital, as the produce exchange aids 
the production of finished commodities. Business orders and 
corporate needs are intermittent, because they depend on 
temporary exigencies; the risks at one end, at all events, are 
eliminated by the unintermittent, continuous market which 
regular speculation affords. The cotton exchange was the 
result of the disorganization of the cotton trade after the civil 
war; speculation in all the other staples has in the same way 
been the consequence of the efforts of the manufacturer to 
avert the risks of intermittent and spasmodic fluctuations in 
the raw material. 



366 Profits [§ 154 

A natural and more recent outcome of this attempt to avoid 
risk is the practice of "hedging" or "covering" transactions. 
An English miller, for instance, needs wheat in February and 
buys his supply in California, let us say, at a price of 90 cents 
a bushel. By the time the wheat reaches his mill and the flour 
has been finally disposed of, it may be September, and the price 
of wheat may have fallen to 75 cents, with a corresponding fall 
in the price of flour. To protect himself against such a loss 
the miller sells in February at Chicago for September delivery 
the same quantity of wheat for the same price as that at which 
he bought, 90 cents. When September arrives, lie again enters 
the Chicago market and makes good his delivery contract by 
buying the wheat at the market price of 75 cents. His profits 
in this deal equal his losses in the other, and by this process of 
"hedging" contracts he eliminates all risk in price fluctuations 
due to the raw material. He is content to derive his gains 
from the profits of his legitimate milling business. Through 
the use of such wheat and cotton futures we thus have the 
paradoxical result that the business man often resorts to specu- 
lation in order to free his business from speculative influences. 

The result of regular speculation, again, is to steady prices. 
If with wheat prices at 80 cents a bushel there is a prospect 
of a large crop, the intelligent speculator will sell short (a 
future) say at 70 cents, expecting to buy in at 65 cents. All 
this selling on the part of the bears, however, tends to reduce 
present prices and thus to increase consumption, which again 
tends to keep the future price from falling so low or so suddenly 
as it would otherwise have done. Vice versa, if a crop short- 
age is in prospect, prices tend to rise, the commodity becomes 
a "good buy" and the bulls are active. The increased pur- 
chases tend to raise present prices and to check consumption, 
while the owners in a rising market hold on for the prospec- 
tive profit. This combination of a somewhat smaller demand 
and a larger supply will prevent such a sharp rise in prices as 
would ordinarily follow a bad crop. Speculation thus tends 



§ 154] Speculative Profits 367 

to equalize demand and supply, and by concentrating in the 
present the influences of the future it intensifies the normal 
factors and minimizes the market fluctuation. Speculation 
hence exerts a directive influence on price. A good example of 
this is afforded by the Gold Law during the civil war. The 
discount on greenbacks was • mistakenly ascribed to the specu- 
lation on the gold exchange, and a law was enacted to prohibit 
all such transactions. As a result, the premium on gold jumped 
at once from 195 to 285, with wild fluctuations day by day, to 
be followed, after the hasty repeal of the law fifteen days later, 
by just as sudden a recession of the price. 

Speculation is hence so perplexing a phenomenon because 
of its Janus-like aspect. So far as it has become the regular 
occupation of a class, differentiated from other business men 
for this particular purpose, it subserves a useful and in modern 
times an indispensable function. The expert dealer on the 
exchanges, who studies and prejudges the market, will in the 
long run secure profits by reducing risks and steadying prices. 
In this wider sense speculative profits are earned like other 
profits. On the other hand, numbers of individuals without 
experience or abihty are constantly taking "flyers" on the 
exchanges, and gamble in securities or commodities as they 
would in cards. Speculation here is as demorahzing to earnest 
effort and thrift as is the lottery. Moreover, even the profes- 
sional dealer will often indulge in what we have termed spo- 
radic speculation, and by an extensive manipulation of the 
market bring about the unsteadying of prices usually connected 
with a "squeeze" or a "corner." Difficult as it is to draw 
the line in practice, the distinction between economic and 
uneconomic speculation is faintly recognized in the ordinary 
attitude toward the bucket-shop as compared to the stock 
exchange. It will be more clearly appreciated in the future 
when the exchanges themselves exercise a more rigid scrutiny 
over the actions of their members, and when business ethics 
wiJl be lifted to a higher plane of social responsibility. At 



368 Profits [§i5s 

present speculation has its economic abuses as well as its eco- 
nomic function. 

155. Monopoly Profits 

In the preceding discussion profits, whether ordinary, alea- 
tory or speculative, have been assumed to be subject to 
competitive influences. The free play of competition, how- 
ever, is often obstructed by natural or artificial barriers. When 
these obstacles are only partial, we speak of economic friction; 
when they are complete, we are in the presence of monopoly. 
In the case of friction, the fortunate possessor of the tempo- 
rary advantages secures an extra gain, which, as we know, will 
ultimately disappear. In the case of monopoly the extra 
gain seems to be permanent. In a deeper sense, however, 
even monopoly profits are not permanent. This is due to 
the principle of capitalization, discussed above (ch. xiv). As 
soon as the monopoly producer disposes of his business, the 
profits are capitalized into the higher selling price, and the 
new purchaser will secure only the interest on the capital 
outlay. While monopolies are often sold, the same result 
is reached through the modern corporate form of business. 
For here the securities, which entitle each holder to a share of 
the monopoly profits, are so influenced by the forces of the 
market that large dividends are at once capitalized into higher 
market prices, with the result that the net returns to the new 
purchaser will be only the current market rate of interest. 
Thus, under modern economic conditions, even monopoly 
profits tend to dissipate themselves. They are essentially 
transitory, except in the hands of the original owners. With 
the continual shifting of ownership, so characteristic of mod- 
ern life, the original possessors soon disappear. Since, how- 
ever, the original owners at any given time are an appreciable 
body, monopoly profits often assume a great importance. 

Monopoly incomes, like competitive incomes, are not limited 
to profits. A class of workmen may be able to restrict entrance 



§ 155] Monopoly Profits 369 

to their trade or to prevent competition with it. In that case 
they would secure monopoly wages. Where the investments 
by banks, savings institutions or trust estates are confined by 
law to a specific kind of bond, there is virtually an element 
of monopoly in the price of that security. Where a particu- 
lar city plot is wanted for specific purposes, the element of 
superiority in the site approaches so close to monopoly that we 
can without gross error speak of a monopoly rent. Monopoly 
profits, however, like all profits, are a result of price. As we 
have already discussed the differences between monopoly price 
and competitive price, we may pass these by in this place with 
the mere reminder that monopoly profits are by no means 
without bounds. The two natural limitations on monopoly 
price, and hence on monopoly profits, are the existence of 
substitution and of potential competition. In the first place, 
as we have learned (p. 258), even where the monopolist is 
securely intrenched, there is always a point of maximum mo- 
nopoly revenue depending on the price at which the greatest 
sales can be effected. Any increase of price above that point 
will lead to the falling off of sales through the substitution of 
some analogous commodity, and thus to a decrease of profits. 
The failure of the Secretan corner in copper was largely due to 
the unexpected use of substitutes, caused by the forcing up of 
the price. Secondly, when, as in many cases, the monopolist 
is subject to the potential competition not of similar com- 
modities but of other possible producers of the same commod- 
ity, his tendency to raise prices will be limited by the danger 
nqt only of a falling off in the general demand, but of the cap- 
ture of a part of this existing market by some new-comer who 
is tempted by the prospect of similar profits. Within these 
limits, however, there is still a large field for the extra gains 
known as monopoly profits. Where the monopoly is based 
upon the existence of patents or copyrights the extra gains 
are deemed legitimate; but only because their continuance is 
supposed to be strictly limited. 



370 Profits [§ 156 

156. Regulation and Justification of Profits 

The demand for governmental control of profits comes from 
three sources, — those who object to ordinary profits because 
they oppose private property; those who decry aleatory and 
especially speculative profits; and thirdly, those who desire to 
eliminate monopoly profits. Let us discuss these in inverse 
order. 

(i) Unrestricted monopoly profits, are of course, socially un- 
desirable. Even where monopoly is not in itself objectionable, 
as in special fields like transportation and certain municipal en- 
terprises, some substitute for the automatic regulative action of 
competition must be secured. Experience, however, has re- 
peatedly shown that this cannot take the form of a regulation 
of profits. The most recent attempt, as that of Massachusetts 
with the gas companies, has, like all its predecessors, been frus- 
trated by the ease with which profits can be adroitly diverted 
into the income of subsidiary enterprises. Efforts to regulate 
profits always result in profits nominally within the limit. The 
only two effectual ways to deflect monopoly profits to the pub- 
lic are either to regulate prices, which will prevent the profits, 
or to tax the enterprise, which will reduce the profits. The 
surest method, however, of eliminating monopoly profits is 
to eliminate the monopoly by keeping open the door of 
opportunity. 

(2) Speculative profits, on the other hand, cannot be reached 
in this way. Monopoly can be distinguished from competition, 
but regular speculation cannot be sharply set off from ordinary 
business. The recent anti-option laws of Germany have either 
been ineffectual or have done harm in preventing the legiti- 
mate and economic benefits of speculation. To prohibit spec- 
ulation is to prevent the good as well as the evil. Taxation, 
again, is applicable only to certain aleatory profits. The effort 
to tax speculative profits encounters the well-nigh insuperable 
difficulty of causing the tax to be actually borne by the recip- 



§ 156] Regulation and Justification 371 

lent of the profits. Finally, the prohibition of speculative 
prices is virtually equivalent to the futile prohibition of spec- 
ulation itself. 

(3) The opposition to ordinary profits emanates from those 
who deprecate the entire constitution of modern industrial 
society. According to Marx, for instance, profits are a defal- 
cation from wages. Since all value, according to him, is the 
product of labor, the surplus value which is called profits is 
a surplus filched from wages. The socialist theory of surplus 
value, however, is defective in four points: (a) It identifies 
labor with manual work and neglects the wages of superintend- 
ence; (6) it ascribes value to labor, whereas labor is not the 
cause of value; (c) it reduces the factors of production to one, 
whereas in actual life there are almost always more than one; 
(d) above all, it overlooks the fact of marginal value. Even 
if we roughly state that prices vary according to cost of pro- 
duction, and even if for purposes of argument we concede 
that cost of production is reducible to wages, all this would 
apply only to marginal cost. The marginal producer, however, 
normally earns no profits, and the surplus which is secured 
by the intramarginal producer may come from a dozen other 
sources than wages. In point of fact it is most unlikely to 
come from wages, since wages under competitive conditions 
are apt to be the same for the identical work in all the enter- 
prises, whether marginal or intramarginal. Profits are indeed 
a surplus, but they are not a surplus of the kind imagined by 
the socialists. The only way to get rid of profits is, as the 
socialists correctly state, to abolish private property in the fac- 
tors of production. The abolition of private property, how- 
ever, would be the abolition of progress. 

This, of course, does not imply that all existing profits are 
defensible. Fraud and chicanery still stalk abroad; illegitimate 
privileges are seized or extorted; unfair advantage is taken of 
weakness or ignorance; public franchises are dishonestly ac- 
quired or inadequately compensated. All this is to say that 



372 Profits [§ 156 

many individuals are still on a low plane, and that the level of 
commercial morality is not so high as it ought to be and as 
it some day will be. This, however, does not touch the legiti- 
macy of profits as an institution. Profits honestly acquired are 
in the main an inevitable concomitant of private property. 
With monopolies reduced to a minimum, with special privi- 
leges abolished or adequately compensated, with speculation 
restored to its true economic function and with competition 
conducted on the high plane of honesty and fair dealing, profits 
will be purged of their alloy and will stand forth in their true 
light as the legitimate fruit of energy and foresight. 



CHAPTER XXIV 
RENT 

157. References 

J. B. Clark, Distribution (1899), ch. xxiii; F. A. Fetter, Principles 
(1915)? part 2; A. S. Johnson, Rent in Modern Economic Theory (1902), 
chs. iii, iv; A. Marshall, Principles (1910), bk. v, chs. viii-x, and bk, vi, 
ch. ix; N. G. Pierson, Principles (1902), part i, ch. ii; W. S. Jevons, 
Theory (1888), ch. vi; H. Sidgwick, Principles (1883), bk- ii, ch. vii; 
F. V. Wieser, Natural Value (1893), bk. iii, part 2; T. N. Carver, Dis- 
tribution (1904), ch. v; A. W. Flux, Principles (1904), ch. vii; H. P 
Seager, Principles (1913), ch. xiv; The Relation between Rent and Interest 
(A. Discussion in Am. Econ. Assoc. Publications, New Series, V, 1904); 
M. Pantaleoni, Pure Economics (1898), part 3, ch. iv; J. S. Nicholson 
Principles (1893-1901), bk. ii, ch. xiv, and bk. iv, ch. v; W. Smart, Dis- 
tribution (1899), ch. XX vi; R. M. Hurd, Principles of City Land Values 
(1903); F. W. Taussig, Principles (191 1), chs. xl-xliv; W. H. Dawson, 
The Unearned Increment (1890); H. George, Progress and Poverty (1879); 
E. R. A. Seligman, Essays in Taxation (1913), ch. iii; J. B. Clark, Essen- 
tials (1907), ch. x; H L. Butterworth, The Farmer and the New Day 
(1919) ; W. B. Bizzell, Farm Tenantry in the U. S., Texas Agric. Station 
Bulletin 278 (1921) ; H. C. Taylor, Agricultural Economics, new ed. (1919). 

158. Nature of Rent 

Rent, as we have learned, is the product of, or income from, 
the single use or succession of limited uses of a thing, and 
rental value is to be contrasted with capital value. In ordinary 
parlance, however, rent signifies the money payment to the 
owner for such a limited use. According as we regard it from 
the point of view of making or of receiving the payment, to 
rent anything is to dispose of or to pay for its use. When 
the social conditions are such that some one commodity is 
commonly rented instead of sold, its income in general is apt to 
be called rent. This was true of land during the middle ages 
in Europe, and is still true in those countries where mediaeval 

373 



374 ^^^^ [§ 158 

customs survive or where modern conditions have brought 
about a relation of landlord and tenant. Since most of the 
land is rented, rent has come to mean the income from land, 
whether rented or not; and since the chief thing that is usually 
rented is land, rent is often made synonymous with the income 
from land alone. 

It is obvious, however, that this is doubly confusing. In the 
first place, in some countries land is more commonly sold than 
rented. This is the case with agricultural land in a community 
of peasant proprietors or of individual farmers; and with urban 
land in all those districts where the inhabitants, rich or poor, own 
their homes. When land is sold instead of rented, the pro- 
ceeds certainly do not constitute a rent. They should rather 
be called a capitalization of the rent, because they involve a 
payment for all future uses. Secondly, other things are often 
more commonly rented than is land. Apart from the fact that 
the rental of real estate frequently included the rent of a house, 
which is economically distinct from the land, men may live in 
their own houses and yet rent telephones by the year, carriages 
by the month, plants by the week, and awnings or table fur- 
nishings by the day. Land rent is qualitatively only an in- 
significant part of all rent. - 

Nevertheless, land is quantitatively so important as compared 
with any other single commodity, and possesses so unique a 
social significance, that the income from land merits a separate 
study. It must be remembered, however, that the utility of 
such an independent discussion emerges only when we regard 
society from the point of view of change, — that is, when we 
consider rent historically, or compare the growth of land rent 
with that of other rents. If we take a cross section of society 
at any moment, and analyze the distribution of the social 
income, the rent of land is to be explained in no different way 
from that of other things. The rent of land is its economic 
product, that is, the contribution of land over and above that 
of the labor and the capital employed on the land. The law 



§ 159] Land Rent 375 

which at any given moment governs the relation of the land to 
its product is the same as that which governs the relation of 
any economic good or factor of production to its product. 
Much confusion has resulted from the failure to observe this 
warning. 

The traditional law of rent, for instance, includes three state- 
ments: rent is the result of the law of diminishing returns; 
rent is a differential or surplus over marginal or no-rent 
land; rent is not a part of cost of production. So far as 
these statements are true, however, they are not peculiar to 
land rent. 

159. Relation of Land Rent to Other Rents 

The law of diminishing returns is indeed the foundation of 
the law of rent, A farmer will sometime reach a point where 
it will not pay to add another laborer or another machine 
to his land, because beyond the margin of profitable expendi- 
ture every additional "dose" of capital or labor will mean 
a return insufficient to cover cost. In every case he will reach 
the extensive or intensive margin of the utilization of land. 
This, however, is not peculiar to the landowner. The capitalist 
will also reach a point where it will not pay him to buy more 
machines of a certain kind, or to build another factory devoted 
to some particular product; and the laborer will reach the point 
where he cannot profitably work any longer. The law of 
diminishing returns is universal, and applies to everything that 
possesses value (§ 88). If it explains the rent of land, it will 
equally explain, as we shall see, the interest of capital and the 
wages of labor. 

Secondly, it is said that land rent is a differential or surplus. 
So, however, is every other kind of rental value. The value 
of everything is a differential or surplus as compared with the 
value of something else lower down in the scale. It may be 
claimed that land rent differs from other rents in that the land 
at the margin is no-rent land, and that land rent is therefore 



376 Rent [§ 159 

due to the differences in the productivity of good land over 
no-rent land. To this the obvious rejoinder may be made that 
we can equally well speak of the no-rent machine or the no- 
rent factory. The reason that we do not commonly use such 
terms is because machines and factories are not so frequently 
rented as is land. The principle, however, is identical. The 
land at the margin may be so poor that no rent will be paid 
for its use; but the machine at the margin may also be worth- 
less in just the same sense. In fact, as we have seen in the 
last chapter, the existence of profits depends upon the surplus 
earnings of the intramarginal producers. It makes no differ- 
ence whether the marginal producer uses poor land or poorly 
situated land or poor machinery or poor buildings or poor 
workmen, he will earn no surplus. From this point of view 
rent is analogous to profit: profit is the surplus over income 
of the no-profit producer; rent may be said to be the surplus 
over the income from the no-rent commodity. This has led 
some writers like Walker to maintain that the laws of profit 
and rent are identical. 

It would be an error, however, to press too closely this 
analogy between rent and profit. In the first place, rent is a 
surplus only in the sense that everything positive is a surplus 
over zero, — a statement which is of little help. The rent of a 
boat is a surplus over that of a no-rent boat; the wages of a 
laborer is a surplus over that of the convict or no-wage laborer; 
the interest of capital is a surplus over the capital so invested 
as to earn no interest. But secondly, if we regard rent as a 
surplus, it differs from profit in that rent is a permanent, and 
profit a transitory, surplus. If a machine is used in a factory, 
a certain part of the product will be traceable to it; that is, it 
will earn a certain return or rent for its owner. Under free 
competition the price of that machine will be, as we know, the 
capitalization of its rent, due regard being had to the number 
of machines. In a state of normal equilibrium the conditions 
of supply and demand will so adjust themselves that the mar- 

l 



§ 159] Land Rent 377 

ginal producer will in the long run give for a commodity only 
what he can get out of it, and others will not give more. If 
all the machines are precise duplicates and are worked under 
the same conditions, their earnings or rent will in the long run 
be equivalent to the interest on the capital invested in them. 
It will be a permanent return as long as the machines work in 
unimpaired efficiency. If the machines did not earn the rent, 
no one would buy them at that capitalized price. On the other 
hand, the only way in which profits can be secured is by the 
owner working his machine under different conditions, that is, 
by giving it more care and combining it with different propor- 
tions of labor or land, taking advantage of variations in the 
market, and so on. These profits, as we know, are under com- 
petitive conditions essentially transitory, and will disappear un- 
less renewed by the use of new machines or a new shifting of the 
productive factors. If better machines, however, are used, the 
surplus gains secured by the producer are really the difference 
in the rent or product of the good machine over that of the 
poorer machines of his competitors. To the extent that his 
profits are a differential derived solely from the use of the 
better machine, he can enjoy them only as long as he guards 
the secret, that is, as long as he retains a monopolistic advan- 
tage. Even in the case of monopoly, however, the profit, as we 
know, will disappear through the process of capitalization as 
soon as the machine or the business changes hands. Thus, 
while the rent is permanent, the profit is transitory. 

Precisely the same is true of land rent. If in a certain 
section of a city, where for a long time there has been no 
change, there are a hundred equally desirable contiguous lots, 
each of them will rent for the same amount. The rent is a 
differential only as compared with less eligible sites yielding a 
lower rent, and finally with land on the outskirts, which, like 
the Hoboken fiats near New York, is worthless for residential, 
business, farming or other purposes, and which therefore has 
no capital value because it yields no rent and no product. 



37^ Rent [§ i6o 

Competition among the hundred lots will inevitably keep the 
rent of all at a point corresponding to the interest on their 
capital value. The landowner can earn no surplus on this 
investment as long as conditions do not change. If, however, 
a new street is opened, or for some reason one of the lots 
acquires a higher rent, the landowner will secure a surplus over 
the interest on the original purchase price. Whether this sur- 
plus is called profit or rent is often thought to be immaterial: 
in point of fact, when a man sells his land he calls it profit; 
but until he sells he calls it rent. Strictly speaking, however, 
the annual rent is the total periodic return of the land, the 
profit only the surplus of this periodic return over the cost, 
or in this case over the interest on the invested capital. As 
soon as the plot is again sold, the price which yields the old 
owner the profit is necessarily the price at which the rent will 
yield the new owner only interest on the capital. Profits are 
thus automatically extinguished by transfers. Rent is perma- 
nent as long as the rent-bearing investment lasts; profit disap- 
pears each time that it is capitalized into a new selling price. 
The difference between rent and profit is applicable to land 
just\s to other things. 

160. Rent and Price 

Thirdly, it is stated that land rent is not a part of cost, and 
that high rents are therefore a result, not a cause, of high 
prices. It is no doubt true that if wheat is raised on land 
which differs in fertility or situation, competition will force the 
price of all the wheat of the same grade up to the cost of 
the marginal producer, that is, the farmer on the poorest land. 
The intramarginal farmer will secure a surplus; and if we call 
this differential surplus rent, it may be said that this differential 
does not enter into the price. Precisely the same, however, is 
true of every other share in distribution. Substitute for the 
plots of land sewing-machines rented out by the month or 
year. Some of the machines will turn out, let us say, more 



§ i6o] Rent and Price 379 

vests of the same quality than others. All the vests will sell 
at the same price, namely, the cost of the marginal producer 
with the poorest machine, and the difference between the 
marginal product and the output of the better machine will 
under competitive conditions go as a surplus rent to the owner 
of the better machine. The surplus seems to be not a part 
of the price. Again, different employers may utilize different 
grades of workmen to fell trees or to build railways. One uses 
a three-dollar American, another a two-dollar French Canadian, 
another a dollar Italian. Yet, as Lord Brassey discovered in 
railway construction, the high-price workman is not really more 
expensive, because his output is greater. If he did not earn 
the higher wage, he would not in the long run get it. Since 
all the trees sell at the same price, namely that of the marginal 
producer who is using the least efficient workmen, the higher 
wage of the American represents a surplus product or labor 
rent over the low wage of the Italian. If we say that the higher 
rent of the good land does not enter into the price of wheat, we 
can equally well say that the higher wage which represents the 
surplus product of the American does not enter into the price 
of trees. The good land rents or sells for more because it pro- 
duces more, — the rent is the product: the high-grade laborer 
secures higher wages because he produces more, — the wage is 
the product. The wages of every different grade of workman 
are a differential in the same sense as the rent of different grades 
of land or capital is a differential. 

It will be said, however, that there is a distinction, because 
even the lowest wages are beyond peradventure a part of the 
cost. So, however, is the rental paid for the worst wheat land. 
The confusion arises from supposing that the worst wheat land 
is no-rent land. It is indeed no-wheat-rent land; but this 
may still be worth a considerable sum per acre, because it can 
be used for other purposes. If the farmer cannot permanently 
earn an income from wheat, he will raise other less valuable 
cereals, or vegetables, or hay, or use the land for pasture. Every 



380 Rent 



160 



piece of marginal land — that is, the poorest land in use for 
some particular product — is worth something for the raising 
of a less valuable product, until we finally reach land that is 
worth nothing for any purpose. In the cost of the wheat, there- 
fore, there must always be included the rent which the marginal 
(or no-wheat-rent) land would earn if employed for the next 
lower use. 

Furthermore, not only must the marginal rent always be in- 
cluded in cost and therefore in price, but in a higher sense the 
differential rent, as a permanent phenomenon, also affects the 
price. The rent of anything is its product; the greater product 
of the better land forms as much an element of the supply as 
the smaller product of the poorer land, and price depends on 
the relation of the total supply to the total demand. If the 
better land yielded less, the total supply would be smaller and 
the price would rise, thus leading to the cultivation of a new 
marginal land. Price in general, as we know (§ 112), is fixed 
not by the marginal or maximum cost but at the marginal 
cost, and the margin depends upon the output of the better 
grades, receding as this increases, advancing as it falls. Every 
bushel of wheat, whether it comes from good or poor land, 
affects the supply, the price and the margin. 

To say that rent does not enter into price is doubly con- 
fusing, not only because it impUes that land rent differs in this 
respect from other rents, but also because the general statement 
is itself misleading. If two different instruments or two differ- 
ent grades of the same instrument are permanently used to 
produce a certain commodity, their rent or permanent contribu- 
tion to the product will of course differ. If the owner of the 
better grade is magnanimous enough to present this permanent 
surplus to the one who rents the instrument, that is, if he remits 
the rent, it will indeed make no difference in the price as long as 
the product is finally sold on the market. In this sense only 
can it be said that rent does not enter into price; for the price 
will be uninfluenced by the fact whether the owner retains or 



§ i6i] Growth of Land Rent 381 

foregoes the reiiL If he remits the rent, it will disappear so 
far as he is concerned, and the rent will in that sense not enter 
into price. It is clear, however, that what really disappears, is 
not the rent, but its original ownership. The rent still exists 
although it is now in the hands of the tenant. If a sewing- 
machine company gave certain operators the use of the machine 
'Tee of rent, and if the vests were sold, at an unchanged price, 
the rent would stay in the hands of the operators instead of the 
company. The only way the rent can be made to disappear 
is to destroy the product. The transfer of ownership does not 
blot it out. The rent of the better instrument is the product of 
the better instrument. Each unit in the supply is a part of the 
total product or total rent, and must therefore affect the price. 
Hence the rent or product of any instrument of production, 
whether it be land or capital or labor, whether it be marginal 
or differential rent, is really an element in the price, in the sense 
that were it not for that product the price would be different. 
Land is here in precisely the same position as other things. 

Notwithstanding these analogies of land rent to other rents, 
however, there remains one difference to which attention has 
already been called. In the case of so-called manufactured 
commodities, increase of demand and production often goes 
hand in hand with lower price; in the case of land increase of 
demand generally means higher price. The supply does not 
respond to the demand with the same rapidity. Land is indeed 
not alone in this respect, for the same is true of many things 
that cannot be duplicated or easily reproduced. Land is, how- 
ever, of such overwhelming importance, as compared to those 
other things, that when we consider its influence on the progress 
of value it is usefully contrasted with them. We shall therefore 
proceed to consider more specifically the rent of land. 

161. Growth of Land Rent ' 

A distinction is sometimes drawn between land rent and 
ground rent; the former is the rent of land for securing some 



382 Rent [§ 161 

material produce, the latter the rent of ground used as a build- 
ing site. Practically the distinction is one between agricultural 
and urban land. Strictly speaking, however, rural land can be 
utilized for other than agricultural purposes, while land within 
the city limits is sometimes used for agriculture. According 
to some authors land rent arises from the fact that the price of 
agricultural products is the same while the cost of production 
differs; ground rent, from the fact that prices differ while the 
cost of production remains the same. This, however, is inac- 
curate. Ground rents differ for precisely the same reason as 
land rents, that is, because city lots, like country tracts, vary 
in their power of affording utilities. Both are productive, even 
though they produce different kinds of utilities; the rural land 
has a value because its material products are wanted, the urban 
land because it is needed as the support of a house or the meeting- 
place of human beings. To assert that the value of land is due 
to fertility or inequality or scarcity or monopoly is either half 
true or inadequate. Situation is as important as fertility. In- 
equality is a measure of the difference in value, not the cause of 
value. Scarcity is an ingredient in the value of every economic 
good. Monopoly may perhaps be predicated of particularly 
choice sites, but hardly of land in general, the different qualities 
of which shade into each other by imperceptible gradations, 
from the vast mass of unoccupied land upward. The rent of 
each piece of land is due to its productive efficiency, and the 
rental value of any plot is the expression of its marginal contri- 
bution to the product. 

In discussing the growth of rent, therefore, the location of the 
margin becomes of importance. We must remember the dis- 
tinction in § 73 between the economic and the non-economic 
margin. The margin may be at such a point that the value of 
the contribution is zero. Here we have the non-economic 
margin. This may be due to the fact that the land is either so 
abundant or so poor in situation or fertility that the value of 
the produce will only just remunerate the labor or the capital 



§ i6r] Growth of Land Rent 383 

employed. The product must normally sufiice to pay current 
wages on that grade of labor or current interest on that class of 
capital, because otherwise that labor and that capital would be 
withdrawn to other enterprises. But there will be no surplus. 
The land, in other words, will yield no rent, because its contri- 
bution at the margin is zero. The value of the joint product is 
due wholly to the labor and the capital. 

If, however, population grows so that the same product now 
acquires an increased value, there will be a surplus ascribable 
to the land. If all the land were of the same grade, and if it 
remained unaltered in quantity, this surplus would be divided 
equally. Since, however, land differs in fertility and situation, 
any increase in the demand will result in the better grades 
securing the greater part of the surplus, while the land formerly 
at the margin will yield a small surplus, and land hitherto un- 
utilized will become a new margin, yielding mere wages and 
interest. If for some reason the supply of land cannot be in- 
creased beyond a given point, the intensive margin will be moved 
up, and the marginal or poorest land will now also yield a surplus. 
The intensive margin now becomes a base from which the 
surplus of all land is calculated. 

The simplest illustration is urban land. If a cross roads 
hamlet springs up in the centre of an agricultural district, the 
land previously of use only for farming purposes yields an 
additional rent as the site of cheap wooden structures. The 
margin has been extended. As population and prosperity 
increase, the hamlet grows into a village, a town, a city, and the 
successive tracts acquire a rent so high that the cottage gives 
way progressively to the brick building, the stone mansion and 
the steel sky-scraper. Just as we speak of pasture land or 
wheat land or truck gardening land, so we can speak of cottage 
sites, brick-building sites, stone-mansion sites and sky-scraper 
sites. Each class of land can be best utilized for certain pur- 
poses, and there are as many margins as there are classes. With 
every change each margin is pushed farther out, the difference 



384 Rent [§ 161 

in the rent of all intermediate sections being finally in propor- 
tion to the distance of the lowest margin or suburban farm 
area from the centre. The location of the margin depends on 
the extent of the demand as modified by the means of trans- 
portation. Each addition to the demand will call forth an 
addition to the total supply, but since this addition can come 
only at the fringe, it is an increase of less eligible land. In- 
creased demand for houses can be met by building equally good 
houses; increased demand for sites can be met only by less 
eligible sites. Under ordinary conditions of progress, therefore, 
ground rent may be expected constantly to increase. 

The expectation may, however, be frustrated not only by the 
fact that different sections of the city may prosper unequally, 
but also by the fact that an improvement in the means of trans- 
portation may decrease the relative eligibility, and therefore the 
rent, of intermediate sections. These practical considerations 
have an important bearing on the problem of the shifting of a 
tax on ground rent as compared to house rent. 

In the case of land rent the interference with the normal 
growth is more pronounced than in the case of ground rent. 
While it is ordinarily true that the best lands will be first culti- 
vated, it has happened in many parts of the world that the less 
fertile lands on the hillsides were preferred because they were 
relatively safe from the incursions of marauders. With the ad- 
vent of peaceful conditions, recourse was had to the better 
lands in the plains or valleys, with an ensuing fall in the rent of 
the original tracts. The same result is often brought about by 
the opening of fertile lands in newer sections. The entrance 
of the middle and far West into the international market, with 
the consequent increase of supply and lower price of wheat, has 
resulted in a great fall in rents in those parts of New England 
and Europe exposed to the competition. Finally is to be 
noticed the effect of agricultural improvements. If they apply 
to all lands, they will lessen the cost, make possible the relocation 
of a new and lower margin, and reduce the price and therefore 



§ 162] Land Rent and Tenure 385 

the rent of all lands. If the improvements remain for a time 
• at least, the exclusive possession of the more ingenious or capable 
farmers, whereby their share of the increased output more than 
outweighs the reduction in price, their rents will increase. If 
this advantage accrues to entire sections or countries, the rent 
in them will grow at the expense of the others, just as in conse- 
quence of improvements in transportation the rents in the far 
West of America have increased, while those in New England 
have diminished. 

Whether land rents in general, at any given period, will in- 
crease or decrease depends thus on the relation of population 
to improvements. Growth of population or an elevation of the 
standard of life means increased demand; improvements in 
production or transportation mean increased supply. When 
the population keeps ahead of the improvements, rents wiU 
rise. When the improvements keep ahead of the population, 
rents will fall. Since, however, the demand for food is nowa- 
days of an international character, a rise of rent in those coun- 
tries or sections which possess or retain the advantage of the 
improvements will still be compatible with a general increase 
in population. In modern times the increase of population is 
more and more due to the growth of industry, which is again 
ascribable to improvements in production. At bottom, there- 
fore, the growth of rent depends on the relative rapidity of 
improvements in industry as compared with those of agriculture 
or in industry applied to agriculture. Since there is on the 
whole a broader field for industrial improvement, it may be 
surmised that ultimately land rents will normally rise. For 
long periods in history, however, land rents may remain station- 
ary or even decline, not only in particular countries, as at present, 
but in the world at large. 

162. Land Rent and Land Tenure 

Since land rent is the permanent surplus or periodic product 
of the bare land, it is to be distinguished from what often seems 
25 



386 Rent [§162 

to be the total return of the land. If a man works the land, a 
part of the product is really wages; if he applies concrete capital 
to the land, another part is really the rent of those instruments, 
which in the long run must be equivalent to the interest on the 
capital invested in them; if he combines the factors, so that for 
the time being he can undersell his competitors or secure a 
greater output at the same price, still another part of the product 
is profits. The wages and the interest are permanent; the 
profits will disappear as soon as they are capitalized into a 
higher selling value of the land or as soon as the methods of the 
more successful cultivator become general. 

When a farmer owns and works the land, it is difficult to 
distinguish these various shares in the product. When the 
owner supplies the land and part of the capital to the tenant 
who does the work, it is slightly easier to disentangle the shares. 
When the proprietor furnishes the land and the tenant does all 
the rest, we have the simplest example. In such a case the 
contract rent paid by the tenant in money or in kind is the 
economic land rent proper; the surplus above the contract 
rent represents his wages as well as the interest on his invested 
capital and his profits. The wages and interest, as we shall 
soon learn, are fixed amounts, while any excess which he can for 
the time being retain constitutes his agricultural profits. If, 
however, the profits are due to improvements the secret or 
knack of which the tenant cannot permanently retain — as, 
for instance, the use of new manures or of better crop rotation 
— they will disappear. According to the conditions of the 
market the surplus will either be dissipated into lower prices 
for the produce, or, on the contrary, will be converted into a 
higher rental value of the land. The only permanent constitu- 
ents of the output or price under competitive conditions are 
wages, interest and rent. 

The contract rent paid in money or in kind for any plot of 
land thus tends under competitive conditions to be equal to 
that sum which will just enable the marginal or least efficient 



§ i62] Land Rent and Tenure 387 

tenant to make normal wages and interest. From the point of 
view of profits it is a non-economic margin (§ 73) ; from that of 
interest or wages, an economic margin. That is, the tenant 
at the margin makes no profits, but if he did not get back his 
interest on capital he could not afford in the long run to use the 
capital, and if he did not earn current wages he would become 
a wage-earner. The competition for different plots of equally 
good land tends to force the rent up to the point where no profits 
are left for the least efficient competitor. The rent paid for 
land is thus the amount that is produced by the marginal farmer 
in excess of wages and interest. Under competitive conditions 
this excess goes to the owner, while any temporary surplus goes 
as profits to the tenant. 

Under actual conditions the contract rent may diverge from 
the pure economic rent. This is due to economic friction. 
Economic rent may be defined as the rent which an intelligent 
tenant who enjoys complete mobility of labor, who has an 
alternative investment for his capital and who is thoroughly 
acquainted with the conditions of the market, could afford to 
pay. But where there is ignorance, lack of opportunity or 
lack of mobility on the part of the tenant, actual rent may be 
higher than economic rent. On the other hand, where for 
social or other reasons the owner does not exact the uttermost 
farthing, the actual rent may be lower than the economic or 
rack rent. This, however, is just as true of other rents as of 
land rents. 

While the simplest form of land rent is that for the use of 
the bare land, experience has shown the utility of a different 
method. This is known in Europe as the metayer .plan and in 
America as the share system, because the owner and tenant 
share in the factors of production and therefore in their re- 
muneration. Share tenure is thus contrasted with cash tenure, 
where the tenant pays a cash sum for the use of the land and 
keeps the rest of the product. The most complete develop- 
ment of this has taken place in the Southern states, where no 



388 Rent [§ 162 

less than tliree important variations of the share system are 
found. They are known as the cropping system, the "third 
and fourth" and ''standing rent" methods. In all cases the 
owner furnishes free of charge a dwelling-house, wood and water, 
pasture for pigs and cows and a small plot for a truck patch. 
In the cropping system the tenant or cropper does all the work 
and supplies his own food; the landlord furnishes seed, farming 
implements, animals and half the fertilizer. He also bears half 
the expense of ginning and wrapping the cotton. The crop is 
then divided equally, and the system is hence sometimes called 
farming "on halves." In the "third and fourth" system the 
owner provides everything except the labor, the tenant getting 
one-fourth of the crop; or the tenant furnishes in addition his 
own food and receives* one-third of the crop. More commonly, 
however, the same name is applied to the system where the tenant 
furnishes labor, tools and animals, while the owner gives only 
the house and land, and therefore receives only one-third of 
some crops, like grain, and a quarter of others, like cotton. 
That is, the landlord and not the tenant gets the third or the 
fourth part of the product. In such cases the " third and fourth " 
renter occupies a relatively higher position than the mere crop- 
per. In the case of "fixed" or "standing" rent the landlord 
furnishes nothing except the minimum mentioned above as 
common to all share systems, and likewise exercises no super- 
vision over the labor of the tenant. The "standing rent" 
system always calls for the production of some specific com- 
modity, while in the money or cash rent system the tenant is 
free to do as he likes. "Standing rent" is thus the nearest 
approach of the share rent to the money rent, and is naturally 
the one suited to the better grade of tenants. In Europe other 
variations of the system are introduced by the apportionment 
of taxes between owner and tenant. 

The subject of land tenure has become so important because 
of the connection between the payment of the rent, the energy 
of the cultivator and the productivity of the land, as well as 



§ 163] Justification 389 

because of the social consequences of land ownership. Under 
the feudal system there was an almost complete divorce be- 
tween owner and cultivator. With the growth of prosperity 
the serf gradually became a free tenant, and in some parts of 
Europe the tenant has become a peasant proprietor or inde- 
pendent farmer. In Ireland the transition is still in process, 
and has been much facilitated by the series of laws which 
began in the seventies and culminated in the Land Purchase 
Act of 1903. In the United States, which was (except in the 
South) almost from the beginning the home of independent 
farmers, there has been during the past few decades an increase 
in the proportion of farm tenants to farm owners. This is 
apparent from the table on the following page. 

It would, however, be a mistake to assume that the tenants 
are growing at the expense of owners. Both owners and ten- 
ants are increasing, even though the tenants are increasing 
faster. In 1900 there was one farm owned for every 14 per- 
sons outside of cities of 8,000 inhabitants and over. In 1850 
the ratio of all farms of whatever description to the popula- 
tion outside of such cities was precisely the same — i to 14. 
It is clear, then, the number of farms cultivated by the owners 
has grown faster than the non-urban population. This means 
that the increase of tenants has come not from previous farm 
owners or their families, but from previous farm hands or hired 
men. The growth of farm tenancy, therefore, is a step forward, 
not backward, in the condition of American agriculture. 

So far as owners are concerned, their burdens will be con- 
siderably lightened by the operation of the federal Farm Loan 
Act passed in 191 6 and described below in §209§. 



163. Justification of Land Rent 

The question of the justification of rent is one not of its ex- 
istence, but of its disposition. Since rent is as much a part of 
the product as wages, to query the justification of rent is in 



39° 



Rent 



[§163 



one sense as unmeaning as to query that of wages. The rent 
which a tenant pays is fixed by economic law; whether he 
hands it to a private individual or to the government is imma- 



Year 


Total 

Number of 

Farms 


Number of Farms Operated by- 


Per Cent of Farms 
Operated by 


Owners 


Cash 
Tenants 


Share 
Tenants 


Own- 
ers 


Cash 
Ten- 


Share 
Ten- 














ants 


ants 


United States 
















1910 


6,361,502 


4,006,826 


826,287 


1,528,389 


64.7 


13.0 


24.0 


1880 


4,008,907 


2,984,306 


322,357 


702,244 


74-4 


8.0 


17-5 


New England 
















1910 


188,802 


173,787 


12,188 


2,827 


92.0 


6.5 


1-5 


1880 


207,232 


189,572 


10,230 


7,430 


91-5 


4.9 


3-6 


Middle Atlantic 
















1910 


468,379 


364,108 


47,081 


57,190 


77-7 


10,1 


12.2 


1880 


488,907 


395,275 


38,781 


54,851 


80.8 


7.9 


II. 2 


E. North Central 
















1910 


1,123,489 


819,892 


99,334 


204,263 


73-0 


8.8 


18.2 


1880 


985,273 


783,782 


52,770 


148,721 


79-5 


5-4 


I5-I 


W. North Central 
















1910 


1,109,948 


767,330 


124,539 


218,079 


69.1 


II. 2 


19.6 


1880 


712,695 


566,443 


2>S,9T2> 


110,279 


79-5 


5-0 


15-3 


South Atlantic 
















1910 


1,111,881 


601,452 


200,931 


309,498 


54.1 


18.1 


27.8 


1880 


634,429 


411,673 


74,946 


157,810 


63-9 


11.6 


24.5 


E. South Central 
















1910 


1,042,480 


513,742 


208,260 


320,478 


49-3 


20.0 


30.7 


1880 


569,739 


360,309 


76,418 


133,012 


63.2 


134 


23-3 


W. South Central 
















1910 


943,186 


445,601 


106,220 


391,365 


47.2 


II-3 


41-5 


1880 


316,909 


205,247 


28,674 


82,988 


64.8 


9.0 


26.2 


Mountain 
















1910 


183,446 


163,756 


8,726 


10,964 


89-3 


4.8 


6.0 


1880 


25,043 


23,199 


406 


1,438 


92.6 


1.6 


5-7 


Pacific 
















1910 


189,891 


157,158 


19,008 


13,725 


82.8 


lO.O 


7.2 


1880 


58,680 


48,806 


4,159 


5,715 


83.2 


7-1 


9-7 



terial so far as its existence is concerned. The point at issue is: 
who should get the rent, the individual or the government. 

Private property in land rents is attacked from three sides. 
The communists assail it because they condemn all private 



§ 163] Justification 391 

property. The socialists assail it because they hold that the 
private control of any factor of production, except that of 
the laborer by himself, involves a robbery of the laborer. The 
land nationalizers and single-taxers assail it because of an 
alleged distinction between land and capital. Although the 
arguments of these three assailants are mutually destructive, 
we shall confine ourselves here to the last class, inasmuch as the 
arguments of the communists and socialists are not peculiar 
to property in land. 

According to the single-taxers land rent is held to be a mo- 
nopoly privilege, and land value is claimed to be a social pro- 
duct. For both reasons the land would then be unsuited to 
private ownership. 

In the first place, however, we have seen that monopoly can- 
not well be predicated of land in general. Worthless land 
exists in abundance. From the worthless to the priceless 
lands, however, there is a continual gradation, and it is impos- 
sible to say where relative abundance and competition stop 
and monopoly begins. Even, however, if the fact of privilege 
is substantiated, it is not competent to single out land. Many 
other privileges are granted by modern society. Patents and 
copyrights are exceedingly valuable, even if temporary, privi- 
leges. The institution of inheritance, whereby society confers 
upon individuals the right of receiving that for which they are 
in no wise responsible, is a privilege which in importance almost 
transcends that of property in land. Certain corporate fran- 
chises constitute privileges, the value of which may be only 
in part referable to the land. That all such privileges should 
be paid for is indeed a legitimate demand; but to claim that 
this payment should be extended to the point of the total value 
of the land would logically lead to the similar claim that the 
total value of all inheritances, franchises, patents and copy- 
rights should be taken by the state. 

Secondly, the assertion that land value differs from other 
values in that it is a social product involves the contention that 



392 Rent [§ 163 

the value of other things is an individual product. Individual 
labor, however, has never by itself produced anything in civil- 
ized society. Take, for example, the workman fashioning a 
chair. The wood has not been produced by him; it is a gift 
of nature. The tools that he uses are the results of the con- 
tributions of others; the house in w^hich he works, the clothes 
he wears, the food he eats (all of which are necessary in civil- 
ized society to the making of a chair), are the result of the 
contribution of the community. His safety from robbery and 
pillage — nay, his very existence — is dependent on the cease- 
less co-operation of the society about him. How can it be 
said, in the face of all this, that his own individual labor wholly 
creates anything? If it be maintained that he pays for his 
tools, his clothing and his protection, it may be answered that 
the land purchaser also pays for the land. Nothing is wholly 
the result of unaided individual labor. No one has a right to 
say, "This belongs absolutely and completely to me because 
I alone have produced it." All value is a social product. 

It may be contended, indeed, that the landowner does noth- 
ing, while the carpenter, at all events, does something. This 
can apply, however, only to the absentee owner of agricultural 
land or to the holder of city land. Under the modern form of 
corporate investment, moreover, even this distinction is robbed 
of much of its importance. Suppose that I invest my capital 
in land or in the shares of a street railway, a newspaper or a 
bank. At the end of ten years I return and find that land 
values have increased, but I also find that the same cause — • 
the growth of population and prosperity — has equally en- 
hanced the value of my railway, newspaper and bank stock. 
It is indeed true that the growth of the corporation calls for a 
continually abler manager, but the only contribution that I 
personally have made to the increased value may be a chance 
vote by proxy for a new board of directors. To all intents and 
purposes the increment is well-nigh as "unearned" in the one 
case as in the other. 



§ 163] Justification 393 

It may nevertheless be conceded that there is a difference 
to this extent, that ultimately the ownership of the capital con- 
trols its management and conditions its most effective social 
utilization. This difference, however, does not suffice to con- 
vert all land values into "unearned increments" and to make 
the increased values of other things "earned." At best it can 
only justify a somewhat higher rate of taxation on land. The 
single-tax movement undoubtedly has a practical validity to 
the extent that it emphasizes the advantages of exempting cer- 
tain classes of personal property from taxation for local pur- 
poses; but so far as it endeavors to abolish every other form 
of taxation, or so far as it purports to afford a solution of a 
great social problem by confiscating land rents, it is sadly 
inadequate. Private property in agricultural land has been 
developed in the course of long centuries as the m.ost effective 
means of spurring on the cultivator to the best methods, and 
thus uniting individual and social interests. To distinguish 
between the social and the individual causes of agricultural 
rent is impossible. The validity of agricultural rents, however, 
involves that of other land rents as well. It is only when the 
control of land by individuals becomes a distinct menace to 
social interests that its rigid regulation, or even its assumption 
by the community, becomes legitimate. 



CHAPTER XXV 
INTEREST 

164. References 

T. N. Carver, Distribution (1904), ch. vi; J. B. Clark, Distribution 
(1899), chs. xii, xiii; F. A. Fetter, Principles (1915), part iv; A. Marshall, 
Principles (1910), bk. vi, ch. vi; G. Cassel, The Nature and Necessity of 
Interest (1903); E. v. Bohm-Bawerk, Positive Theory of Capital (trans. by- 
Smart, 1891), bk. vii, and Recent Literature on Interest (trans, by Scott, 
1903); N. G. Pierson, Principles (1902), part i, ch. iv; F. v. Wieser, 
Natural Value (trans, by Malloch, 1893), bk. iv; W. S. Jevons, Theory 
(1888), ch. vii; I. Fisher, The Rate of Interest (1907); A. W. Flux, Prin- 
ciples (1904), ch. vi; M. Pantaleoni, Pure Economics (1898), part 3, ch. 
iii; J. S. Nicholson, Principles, bk. ii, ch. xiii; F. W. Taussig, Principles 
(1911), chs. xxxviii-xl; H. R. Seager, Principles (1913), ch. xvi; G. 
Billeter, Geschichte des Zinsfusses im Griechisch-romischen Alterthum bis 
auf Justinian (1898); W. J. Ashley, English Economic History (1893), 
II, ch. vi; H. C. Lea, Ecclesiastical Treatment of Usury (Yale Rev., II, 
1894); G. K. Holmes, Usury in Law and Practice (Pol. Sci. Quart., VII, 
1892). 

165. Nature of Interest 

To the ordinary man interest seems to be the payment for 
a loan of money, precisely as wealth seems to consist of a sum 
of money. In point of fact, however, interest is paid for the 
use of the capital which the money represents. It is the earn- 
ings or product of the fund of capital, just as rent is the earnings 
of the individual pieces of capital. Interest is commuted rent, 
or the calculation form of rent. Just as a business man must 
deduct the rent or royalty of some patented machine used by 
him before computing his profits, so, if he buys the machine 
outright, he must deduct the interest on the capital invested in 
the machine. Whether he uses his own capital or borrows it 
is immaterial; in the latter case it is loan or contract interest, 

. 394 



§165] Nature of Interest ^95 

in the former it is natural or economic interest. The distinction 
is the same as that which we have learned between contract 
and economic rent. Whether he pays the interest to another in 
virtue of some contract or keeps it makes no difference. The 
amount of interest, however, is not the same thing as what is 
usually called the rent of the particular machine. For the fund 
of capital is represented by many other concrete commodities 
besides machines. Total interest is always total net rent; 
that is, the total net product of the entire fund of capital must 
be the same as the total product of the aggregate of all the 
individual pieces of capital. But this is very different from 
saying that the interest on a thousand dollars is the same as 
the annual gross rent of a particular machine costing a thousand 
dollars. 

This is due to the fact that rents and capital values of single 
commodities are as different as the commodities themselves. 
They run through the whole gamut of value from zero to well- 
nigh incalculable sums. Capital, as a fund, on the other hand, 
is a unit. Pieces of capital are heterogeneous; a fund of cap- 
ital is homogeneous. There is no rate of rents or of capital 
values; there is a general rate of interest. Interest on a thou- 
sand dollars may be fifty dollars; a machine and a horse may 
cost a thousand dollars, and yet they may rent for very differ- 
ent sums because of their unequal durability. If all concrete 
units of capital were alike in productivity and if there was no 
question of durability, rent would always be the same as interest. 
It is precisely because individual pieces of capital are not alike 
that rent differs from interest, although total rent must always 
equal total interest. 

The statement that capital as a fund is homogeneous must 
not be misunderstood. Two identical pieces of capital, let us 
say two machines, may yield very different products, because 
the one may be carefully looked after and the other badly 
neglected. In the same way equal amounts of capital may be 
loaned to two persons, one of whom may be expected to repay 



396 Interest [§ 165 

promptly, while in the other case there may be a risk. Just 
as the two machines, although technically the same, are econom- 
ically different, so the two individual sums of capital, although 
in one sense homogeneous because reduced to a fund of value, 
are yet economically and from the point of view of the lender 
different productive instruments or income-bearing agents. 
Actual interest rates on loans therefore fluctuate with the degree 
of security and the probability of repayment. Interest rates 
on land vary, for instance, with the ratio of the loan to the 
property. In New York City recently a loan equal to one-half 
the assessed value of the land could be secured for four per 
cent, a somewhat larger sum for four and a half per cent, and 
about three-quarters of the value for five per cent. The rate of 
interest on bonds varies from slightly over two per cent on 
government loans to five, six or seven per cent on local or 
industrial paper of more doubtful security. When we speak 
of the fund of capital as homogeneous, we refer to the identity of 
potential use, not to the conditions of repayment. A study of 
the normal rate of interest is a study of natural interest, or the 
returns from the use of capital on the assumption of complete 
mobility, free competition and the presence of the economic 
motive. The fact that a person who has borrowed the capital 
and pocketed its earnings chooses not to repay all of it, will 
affect the rate at which that particular person or other persons 
of his class can in future secure a loan, but will leave untouched 
the normal rate of interest on good security. Risk causes a 
fluctuation from the normal rate of interest; it does not affect 
the normal rate itself which is paid on capital when there is 
virtually no risk. So far, of course, as there is an element of 
risk in all human transactions, the cost of this minimal risk 
must be included in the rate of interest. But in ordinary 
"gilt-edge" loans this may be practically disregarded. 

Interest rates not only fluctuate on loans to different individ- 
uals or classes, but vary in different sections or parts of the 
same country. This, is, however, so obviously an illustration 



§ 165] Nature of Interest 397 

of the fact that we are deaHng with different markets as to need 
no further elaboration. A study of interest rates, Hke that of 
all other cases of value, refers to conditions in a given market. 
If the study discloses the general principles of value in a market, 
it will be adequate to explain the relative variations in different 
markets. 

Another seeming exception to the principle that interest is 
the earnings of a homogeneous fund of capital is afforded by 
interest rates on "call loans" in financial centres, — that is, on 
loans which may be called or terminated at will, as opposed 
to ordinary time loans. The general rate of interest in New 
York may be four or five per cent, but in the parlance of Wall 
Street "money may be worth" on a given day only one or two 
per cent when "it is a drug on the market," and may at another 
time "be so tight" as to command an interest rate of several 
per cent a week or several hundred per cent a year. The ex- 
planation is not difficult. Interest in general is paid for a fund 
of capital, because that fund ultimately represents some con- 
crete pieces of capital that afford a service. The manufac- 
turer invests the capital in new machines or buildings, the 
merchant in new facilities of transfer, the farmer in more land 
or better implements. In the case of Wall Street, however, 
what is wanted is not capital for technical production, but 
capital in the form of liquid assets or a disposable surplus of 
cash to meet current liabilities. The ordinary rate of interest 
depends upon the demand and supply of capital for productive 
purposes; the rate of interest on call loans depends on the 
demand and supply of the fluctuating mass of loanable funds 
which are on the instant convertible into cash. The rate of 
interest on call loans may be high when the general rate of 
interest is low. In the case of call loans the payment is for 
the temporary use of the money considered as a commodity 
in itself; in the case of ordinary loans the payment is for the 
use of an aliquot part of the social capital of the community. 
For a fuller treatment of this point see § 207. 



398 Interest [§ 166 

166. Interest and Forbearance 

We have learned that the real value of all things consists in 
their rents or actual uses and that the fundamental aspect of 
value is rental value. We have also learned that rental values 
are transmuted into capital values, and that capital value 
depends upon a succession of anticipated income or rental 
values. Finally, we have learned that this process of capitali- 
zation, or of estimating the present worth of a succession of 
future uses, depends upon the fact that men habitually put a 
lower present estimate on future uses than on present uses. 
Interest thus involves a discounting of the future and is a nat- 
ural phenomenon because it represents a natural discount. It 
corresponds to the difference in the time utility of things, as 
actual rents or usufructs correspond to difference in material 
utility. 

In the case of more or less durable articles of consumption, 
we can postpone or wait for each use or service as it recurs; 
or we can dispose now of all its expected future uses by selling 
it outright. Obviously there is a disadvantage in waiting, 
because the present satisfactions that we could buy are more 
keenly appreciated than these future satisfactions. In paying 
us a capital sum, therefore, the purchasers or actual consumers 
will insist on a reward for their forbearance. We can invest 
the money in something that can be consumed at once; they 
must wait for each recurring service or use of the commodity 
now in their possession. As the future changes into the pres- 
ent, each use of the commodity will afford them a definite 
satisfaction; but at the present moment the actual value of 
each anticipated future use is somewhat smaller than will be 
the value of that use when realized. This difference or discount 
is the reward for forbearance, that is, for postponing present 
satisfactions. 

Articles of consumption, however, must be replaced. A 
stock of consumption goods can continue or increase only 



§ i66] Forbearance 399 

through the means of production goods. If things are used 
for productive purposes, their capital value must be explained 
in the same way as that of consumption goods. The person 
who has created a piece of capital must be rewarded for his 
waiting. Instead of consuming everything now, he prefers to 
put a part of his energies into producing something which 
will last, and will help him in the future. He postpones his 
gratifications, he waits for the future rents or earnings of this 
thing that now has a capital value, because it capitalizes the 
anticipated rents or earnings. As these future earnings become 
with the lapse of time present earnings, they acquire a greater 
value, — greater by the amount that a present satisfaction ex- 
ceeds a future satisfaction. When a man puts his capital into 
a savings bank or into a business or into a concrete commodity, 
the aggregate of earnings or services as they mature exceed 
the present capitalized worth of those earnings. The capital, 
as it is said, will earn (in the future) a surplus over its present 
(capitalized) value. If he keeps the capital, this surplus will 
accrue to him; if he loans it, the borrower must pay him the 
surplus which will have been earned by the time that the capital 
is repaid. If we own a boat and rent it out, it may bring in $150 
before it is finally discarded after a dozen years; but if we sell 
it now it may fetch only $80. The difference, or $70, is the 
interest or surplus reward which accrues to us if we wait for the 
future earnings to come in. As the future uses or earnings 
ripen into present earnings, they acquire an enhanced value. 

To say, however, that interest is the reward of forbearance 
does not suffice. We must remember that all price depends 
on marginal utility. We are always comparing one kind of 
enjoyment with another, and the increments of satisfaction 
diminish with the supply until we reach a certain point or 
margin where the increment of satisfaction afforded by a given 
service or commodity is overtaken by that afforded by another. 
When, therefore, we compare present with future satisfactions, 
we are really comparing marginal increments of enjoyment. 



400 Interest [§ i66 

Our present estimate of each successive future use of a com- 
modity diminishes as that use recedes into the future; but the 
extent to which we are willing to refrain from present con- 
sumption depends on the relative amount at our disposal. If 
we have a large quantity of a commodity or a large sum of 
money with which to buy it, we can consume only a small 
portion now, and may be quite ready to lay by the rest because 
it does not involve any perceptible sacrifice. With every 
diminution in the amount at our disposal, however, the greater 
will be the importance which we attach to present satisfactions, 
and the more remote will appear the advantage of saving for 
the future. Finally, a point will be reached where these two 
considerations balance each other, and where we shall be on 
the margin of doubt whether to save or to spend. Beyond 
that point we shall surely not save, because we secure more 
satisfaction from present enjoyment. 

When, therefore, we say that interest is the result of forbear- 
ance, we really mean that interest is the result of marginal 
forbearance, or forbearance at the margin. The disadvantage 
of waiting, which is the essence of interest, is the disadvantage 
of waiting at the point where we get ready to substitute one 
kind of enjoyment for another. This marginal point will 
indeed be a different one for the rich and the poor, for the spend- 
thrift and the miser; but this difference will affect the rate of 
interest as little as the relative wealth of the purchaser affects 
the price of wheat on the exchange. The value of wheat is the 
expression of its marginal utility to the wheat-using group; 
the interest on capital corresponds to the difference in the 
marginal estimates of present and future uses for the whole 
capital-using group. Value in the market is social value (§ 74). 

Interest, then, is not simply the discount between present and 
future enjoyments in general. There would indeed be no 
capital if there were no saving, but all saving does not involve 
a sacrifice or disadvantage. People would save something 
even if there were no interest. A prudent man knows that 



§ 167] Interest and Productivity 401 

he will need something for a rainy day; a far-sighted man 
may even believe that the future social demand for a commod- 
ity or service will grow, and he would then save or accumulate 
the particular capital even if there was no reward in the form of 
interest. For if he is right, it will be worth more to him in the 
future than it is at present. But when a man saves or accumu- 
lates capital, he would, if there were no interest, soon reach a 
point where his gains from accumulation would be overtaken by 
his loss in foregoing present enjoyments for future satisfactions. 
This would be the margin or final point where he would stop 
sating or capitalizing. Interest therefore is the discount 
between present and future marginal increments of enjoyment; 
that is, interest is the measure of the marginal disadvantage 
of forbearance. 

Moreover, since at this margin men are constantly compar- 
ing the service of one commodity with that of another, interest 
is the return for awaiting not simply the future service of some 
particular piece of capital, but that of any other piece of capi- 
tal which may be substituted for it. In other words, the rate 
of interest depends on the difference between the actual esti- 
mate of the present and that of the future services of the whole 
mass of capital at the margin, that is, of the marginal increments 
of the entirety of capital. 

167. Interest and Productivity 

It is obvious that unless a commodity afforded some services 
or earnings there would be no use in waiting and no advantage 
in forbearance. Instead of centering our attention upon the 
forbearance we may equally well turn our consideration to the 
future services which capital will yield. In lieu of looking at the 
problem from the point of view of waiting for the service, we may 
approach it from that of the capital which affords the service. 
As soon as we do this, we face the problem of productivity. 

Particular pieces of capital are undoubtedly productive. An 
axe enables us to secure a greater result than if we used our 
26 



4-02 Interest [§ 167 

hands, A machine utilized by a laborer produces more than 
the labor alone could produce. If particular pieces of capital 
are productive, capital as a whole must be productive. If the 
commodity no longer affords a service, it will lose its value as 
a piece of capital, that is, it will no longer be capital. Con- 
versely, capital will be accumulated because of the earnings to 
be derived therefrom. When we speak of capital, we inevi- 
tably think of the earnings of capital. 

Owing to the law of diminishing returns, there is a limit to 
the profitable use of particular pieces of capital. If a given 
force of workmen had previously used only their hands, and if 
a machine is introduced, like a loom, the product will be at 
once increased. If the single loom does not occupy all the 
time of the workman, miore will be introduced, until with say 
ten looms each workman is fully employed. The addition of 
an eleventh loom will still increase the product, but the addi- 
tion will not be so great as before the point of maximum utili- 
zation had been reached, because the workman cannot tend 
each loom so carefully. A twelfth and thirteenth loom will 
add continually smaller products, until finally an additional 
loom will add nothing at all. Now, since every loom is as good 
as the other, the earnings or the productivity of each is at any 
given time measured by that of the last or marginal loom em- 
ployed. If there are ten looms, the contribution of each is 
equal to that of the tenth; if there are thirteen, the contri- 
bution of each is equal to that of the thirteenth. The earnings 
of the marginal loom, that is, its additional contribution to the 
product, is its rent, and if the looms are hired from the owner, 
the money rent paid to him for each loom will be equivalent 
to the marginal earnings, that is, the earnings or contribution 
to the product of the marginal loom. If the entire capital of 
the community consisted of looms, the annual product of the 
looms would be the gross return of the capital invested in looms; 
and this product, less the cost of repairing and replacement, 
would be at once the net rent and the interest. 



§ 167] Interest and Productivity 403 

The total capital of a community, however, is composed of 
other things than looms. Capital as a whole includes all the 
concrete pieces of wealth. When we borrow a thousand dol- 
lars, we secure the opportunity of embodying that sum in any 
individual piece of concrete capital. That sum has a value 
because it is productive, in the sense that it can at once be 
incorporated into something that yields a product. Since indi- 
viduals are constantly competing for the privilege and are substi- 
tuting different embodiments of that fund of capital according 
to their estimate of the returns to be derived, it is clear that 
at any moment the productivity of the entire mass of capital 
in existence is measured by that of the particular piece of capital 
at the margin of employment. It may be a loom or anything 
else. Productivity of the fund or aggregate of capital means 
marginal productivity. 

This margin of employment, however, is not simply the 
margin of indifference as between various pieces or increments 
of capital; it is also a margin of indifference as between the 
various productive factors in general. Owing to the same 
principle of diminishing returns, the United States Steel Cor- 
poration must continually consider whether it pays better to 
add another machine in a given mill or to burn more coal in 
order to speed the machines faster; whether it is more advan- 
tageous to put additional capital into that particular mill or into 
the steamers which transport the product to the market. In 
the same way they must consider whether it pays better to 
crowd more machines into the same mill or to acquire more 
land and build a new mill. Finally, they must consider whether 
it pays better to increase the labor force for the purpose of 
getting more work out of the same machines, or to increase 
the number of machines. Every practical business man realizes 
that there is such a margin of indifference, beyond which an 
additional application of capital will not yield as great returns 
as an additional application of labor, or vice versa. 

What is true of the individual is equally true of society. 



404 Interest [§ 167 

The total capital in a given market is constantly competing 
with the total supply of other productive agents. The margin 
of employment which tells in the determination of the normal 
rate of interest is a social margin. All the individual pieces of 
capital are reduced to terms of money, and the fund of capital 
in any market is the capital value of all the single pieces of 
capital. The marginal productivity of this fund of capital is 
the earning capacity of the increment embodied in the particular 
piece of capital employed at the margin. That particular 
increment of capital will yield a certain return, and that return 
or addition to the capital constitutes interest. 

When we have free competition and complete mobility of 
capital, any increment can earn only as much as the marginal 
increment, for, since they are interchangeable, any increment 
at a given time may be considered the last or final one. In- 
terest is the addition to itself which the capital in a given market 
earns at the point of marginal utilization. Interest, in other 
words, is the product of the marginal increment of capital. 

It makes, therefore, really no difference whether we say 
that interest is the measure of marginal productivity or the 
measure of marginal forbearance. They are two ways of stating 
the same fact, just as we know that the value of all things may 
be expressed in terms of marginal utility or of marginal sacri- 
fice. When we speak of the productivity of capital, we think 
of utility; when we speak of forbearance, we think of sacrifice. 
Interest, like all value, may be explained in terms of one or of 
the other, for marginal increments of utility and of sacrifice 
tend to be equal. When, however, we say that the marginal 
increment of capital employed at any given moment yields a 
certain return, we must not forget that in a deeper sense it is 
not the pispce of capital which creates the product or interest, 
but that it is the product or interest which is responsible for 
the capital. Capital value is the reflex of the value of the 
anticipated services. Capital is capitalized income. 



§ i68] Course 405 

168. Course of Interest 

Since interest is the measure of marginal productivity and 
marginal forbearance, the actual rate of interest depends on the 
location of the margin. Like every other margin, this is a 
result of an equilibrium or balancing of economic forces. 

It is obvious that in early stages of development the margin 
is high. There is a great scarcity of capital; and it assumes 
the form chiefly of the rudest kinds of implements which cost 
but little time and labor to create. The margin of indifference 
is a high one, and therefore the marginal productivity of capital, 
that is, the rate of interest, is high. 

As capital accumulates, the margin recedes. While the 
growth of capital augments prosperity, the product ascribable 
to each individual piece of additional capital is smaller than 
before. At the new margin where men are debating whether 
to spend or to save, whether to work for current needs or to 
work harder for future needs, the same result can be secured 
only by greater labor. The marginal piece of capital, in other 
words, has a lower productivity. The rate of interest falls, 
because the capital employed at the margin produces less for 
itself, that is, adds less to itself. The addition to itself at the 
margin is the rate of interest. 

In so far, hence, as progress means the continual multipli- 
cation and improvement of capital, it implies a steady reduction 
in the rate of interest. Capital develops not only in quantity, 
but in quality. We have not only more pieces of capital, but 
better ones. The clumsy tools are replaced by fine machines, 
the log house gives way to the sky-scraper, the wheelbarrow to 
the electric locomotive. The total product, that is, the aggre- 
gate wealth of the community, augments, and there is such an 
increase in the number of increments of capital that at the 
margin, where the- final increment of capital is employed, the 
selling value of its product will be less than before. Prosperity 
depends upon total product, but value depends upon marginal 



4o6 Interest [§ i68 

product; the marginal product of capital decreases, while the 
total product of all the capital increases. The rate of interest 
falls because the margin of employment falls; but as the margin 
falls, the quantity of capital grows, its quality improves and 
wealth increases. 

According to the recent researches of Billeter, the normal 
rate of interest on good security during the period of greatest 
prosperity in Athens was about 12 per cent; while in Rome 
at the close of the republic it had fallen to between 4 and 6 
per cent. Starting in again during the early middle ages at 
a rate of 20 per cent and 15 per cent, it gradually fell, until in 
the great financial centres of Holland toward the close of the 
eighteenth century it reached a rate of between 2 per cent 
and 3 per cent. Since then the rate has again risen, for reasons 
to be mentioned in a moment. 

It would be a mistake to assume that the margin is fixed 
simply by the alternative returns from land. It is true that 
where land is abundant, and land rent therefore low, the rate 
of interest is high. It is equally true that one of the causes 
responsible for the rise of interest has been the opening up of 
vast stretches of cheap land in the New World. As the margin 
of cultivation moved outward, the same piece of capital applied 
to the land yielded larger results; that is, the margin of the 
productivity of capital moved upward, and the rate of interest 
moved with it. But changes in the productivity of land are not 
the sole factor in affecting the productivity of, and therefore 
the demand for, capital. If labor should become less costly, the 
margin would also move up. Just as in the preceding case 
a unit of capital would produce more when applied to a given 
quantity of less expensive land, so now a unit of capital would 
produce more when used in conjunction with a given quantity 
of less expensive labor. The only difference between the two 
cases is that the lower cost of land would mean a lower land 
rent, while the lower cost of labor might mean either lower 
wages or, when lower cost is due to greater efficiency, higher 



§ 169] Tendency to a Minimum 407 

wages. During the past century, for instance, one of the reasons 
mihtating against a fall in the rate of interest has been the in- 
creased productivity of capital due to the lower relative cost 
of labor, whether the new capital has been used in Java with 
the low-wage peasant, or in America with the high-wage factory 
hand. The consideration of wages, however, must be deferred 
to the next chapter. 

The location of the margin may be affected not only by 
changes in the relative productivity of other factors of pro- 
duction, but by changes affecting capital itself. Continual 
improvements in capital undoubtedly increase general produc- 
tivity, but as qualitative improvements in pieces of capital are 
subject to the law of diminishing returns, their introduction is 
normally accompanied by a decline in the rate of interest. In 
Japan as in the Canadian Northwest interest rates are rapidly 
falling, although fresh land is scarce in the former, and abun- 
dant in the latter, country. In the same way the moving force 
may come from the side of demand or forbearance rather than 
of supply or productivity. The general state of society may 
affect the readiness to postpone present for future gratifications. 
When the Filipinos complain of a scarcity of capital, they forget 
that the social and political conditions have been such as to 
discourage the sense of saving. The true education for the 
Filipino, as it is for the Negro, is to inculcate such habits of 
mind as to augment the readiness to forego present satisfactions. 
Whatever does this lowers the margin and leads to a fall in the 
rate of interest. 

169. Tendency of Interest to a Minimum 

A gradual decrease in the rate of interest is normal as well 
as beneficial to the community. It lowers cost and enhances 
prosperity. It would, however, be an error to conclude that 
this tendency is constant, and that the interest rate will dis- 
appear or even reach a bare minimum. For, as the rate ap- 
proaches a certain low point, it sets in motion forces to prevent 



4o8 Interest [§ 169 

any further reduction. This can be approached from two points 
of view. 

The first consideration is the unlimited potential capacity of 
modern society to utilize capital. A low interest rate, say 
three or four per cent, is possible only in a community amply 
supplied with capital. In such a complex society the demand 
for a greater control of the conveniences of life is virtually in- 
satiable, and individuals and government alike will be deterred 
from entering upon ever larger schemes of permanent im- 
provement and investment only by the consideration of cost. 
If the rate of interest should conceivably fall so low that the cost 
of capital might be neglected, it would lead to a well-nigh in- 
calculable multiplication of durable commodities. Every city 
would be pierced by innumerable subways, railroads would be 
more common than country paths, laborers would live in pal- 
aces and all other fairy flights of the imagination would be 
realized. This very statement is sufficient to show its ab- 
. surdity. Capital could be costless only if the concrete pieces of 
capital cost nothing. But we know that while progress is con- 
stantly reducing the cost of some things, the fall in price en- 
genders a production of new things, previously non-existent. 
As long as human labor involves some sacrifice and human 
demands are illimitable, there will always be some things that 
cost labor. 

If individual durable things, however, cost something, capi- 
tal as a whole can never become costless, like air or water. 
The reduction in the cost of some forms of capital will at a 
certain point be balanced by the rise in the cost of new forms 
of capital which formerly did not exist and therefore had no 
cost. As long as invention keeps ahead of demand, cost will 
fall; but with every reduction in cost demand increases, and 
when demand can no longer be satisfied by an increase in the 
supply, when, in other words, the law of diminishing returns has 
made its influence felt, any serious reduction in the aggregate 
cost of capital is impossible. Putting it in another way, we 



§ 169] Tendency to a Minimum 409 

may say that after a certain point has been reached any addi- 
tional decHne in the interest rate will mean a more than pro- 
portionate increase in the demand for capital, and this aug- 
mented demand which cannot be met by any corresponding 
decrease in cost will prevent any further reduction in the rate. 
As capital becomes more abundant, its marginal productivity 
in terms of value will decrease, but the decrease itself will be 
arrested at a certain point. So far as experience seems to show, 
this point means a rate of between 2 per cent and 3 per cent. 

The same result can be reached by approaching the problem 
from the other side, that of marginal forbearance. The readi- 
ness to accumulate capital depends on the comparison between 
present and future estimates. The accumulations of a very 
rich man as well as of a very poor man are apt to be only slightly 
affected by an unduly low rate of interest, — the very rich 
man because he cannot well help accumulating, and the poor 
man because he has so narrow a margin for saving of any kind. 
In the case of the ordinary man, however, who is really respon- 
sible for the growth of capital, the matter is different. It is 
not utterly arbitrary to assume that a man in moderate cir- 
cumstances will commonly be willing to restrict his expenses 
and lay aside annually a sum about equal to that which he 
expects to enjoy as income in the future. The time required 
for accumulating a capital which will yield such an income 
will be, at 6 per cent interest, 12 years; at 3 per cent, 24 years; 
at 2 per cent, 35 years; at i^ per cent, 47 years; at i per cent, 
70 years.^ If the interest rate falls from 6 per cent to 3 per 
cent, the reward, even if smaller, will still be worth while, and 
in order to provide himself with an adequate income the indi-^ 
vidual may accumulate a larger capital than before. But if 
the rate falls to i| per cent he will seek to secure the future 
income in some other way without accumulating a capital. 
Nowadays he would go to an insurance company and buy an 
annuity, and even if he wishes to purchase an annuity to last 
1 Cassel, The Nature and Necessity of Interest, p. 146. 



41 o Interest [§ 170 

long enough to include the life of his children, the advantage 
of an annuity which at a high rate of interest is exceedingly slight 
becomes more and more substantial as the rate of interest de- 
clines. With a change in the above figures, the conclusions 
will of course vary; but in any event, taking the practice of 
the ordinary man, it is susceptible of a reasonably legitimate 
calculation that the rate of interest cannot fall much below 
2 per cent, because otherwise the desire to accumulate would 
be effectually checked. While precise figures are manifestly 
impossible, it seems that the margin which fixes the rate of in- 
terest thus stands in a close relation to the length of human 
life. If human longevity were to increase, the possible mini- 
mum in the rate of interest might be far lower than is likely 
to be the case under present conditions. 

170. Regulation of Interest 

Interest, therefore, like rent, is a natural phenomenon, which 
must exist wherever private property in durable quantities is 
found. Yet until recent times government has always attempted 
to restrict the rate of interest. 

At the outset, when the function of capital was not compre- 
hended, interest was considered a return for the use of money. 
Since the chief function of money was held to be its use as a 
medium of exchange, any compensation, other than the trans- 
fer of the thing exchanged, was deemed unjustifiable. The 
price of the use — the pretium usus — was usury, usura, and 
wholly indefensible. Usury and interest were synonymous, 
because the use for which a price was paid involved an interval 
of time "between" (interest) the loan and the repayment. 
Yet although seemingly unjustifiable, the exigencies of busi- 
ness life compelled the borrower to make some payment if he 
desired to induce the lender to part with his property. Public 
opinion began to recognize the legitimacy of some moderate 
return to the lender, primarily as a compensation for risk. The 
wedge was gradually pushed further in, until a distinction was 



§ lyo] Regulation of Interest 411 

drawn between the legitimate return, now called interest, and 
the illegitimate surplus known as usury. Legislation no longer 
prohibited all interest, but only excessive interest. Yet the 
legal rate of contract interest was changed from time to time as 
the natural rate declined. 

The development of modern capitalism, and the recognition 
of the fact that interest is paid for the use of capital rather than 
for that of the money representing the capital, have led during 
the last half-century to the final stage, — the abolition of usury 
laws. The modern theory rests on the conviction that free- 
dom of loans enures to the interest of the borrower as well as 
of the community. To prevent the lender from securing the 
market rate is to curtail the offer of capital, to restrict the pro- 
cess of accumulation and to increase the price, open or secret, 
which the borrower must ultimately pay. With free competi- 
tion and complete mobility of capital, which are the characteris- 
tic features of modern business life, the lender will get only what 
his capital actually earns; the contract or loan interest will 
approximate the natural interest. The usury laws still found in 
some of the American states are an anachronism.^ 

It must, however, not be forgotten that this defence of free- 
dom in borrowing rests on the assumption which underlies all 
liberty, namely, relative equality in bargaining. Where the 
loans are for immediate consumption rather than for productive 
purposes, and where even in productive loans there is such a 
glaring discrepancy between the lender and the borrower that the 
former is able to take an unfair advantage of the latter, the rea- 
son of the rule falls away and some degree of protection may be 
needed for the borrower. This is recognized in the recent laws 

^ England abolished the usury law on short-time commercial paper in 
1839, on all except real estate loans in 1850 and on all loans in 1854. 
In the United States usury laws are still found in fourteen states. In 
New York the penalty includes not only loss of principal and interest, 
but also a fine of $1,000 and imprisonment for six months. This, how- 
ever, was so manifestly absurd, that in 1882 call loans of $5,000 and over, 
made on negotiable securities, were exempted from the law. 



412 Interest [§ 170 

of both England and Germany, where provision is made for such 
exceptional cases. In the overwhelming majority of instances, 
however, modern business loans rest upon the equaHty of busi- 
ness opportunity and the free competition of capital. Under 
such conditions usury laws are futile and worse than futile, be- 
cause they either tend to evasion or become a drag on industry. 



CHAPTER XXVI 
WAGES 

\ 171. References 

J. B. Clark, The Distribution of Wealth (1899), chs. vii, viii, xii, xxi, 
and Essentials of Economic Theory (1907), chs. xiv, xv, xvi, xvii, and 
xxv; F. A. Fetter, Principles (1915), ch. xix; T. N. Carver, Distri- 
bution (1904), ch. iv; A. Marshall, Principles (1910), bk. vi, chs. iii-v; 
F. A. Walker, The Wages Question (1876), part i, ch. viii, and part 2; 
H. R. Seager, Principles (19 13), ch. xv; N. G. Pierson, Principles (1902), 
part I, ch. vi; A. T. Hadley, Economics (1896), ch. x; J. S. Nicholson, 
Principles (1893-1901), bk. ii, chs. x-xii, bk. iv, ch. vii; and Machinery 
and Wages (1892); H. L. Moore, Laws of Wages (191 1); W. S. Jevons, 
Theory (1888), chs. v, viii; W. Smart, Studies in Economics (1895), 
chs. i-iv; J. A. Hobson, Economics (1900), ch. vii; M. Pantaleoni, 
Pure Economics (1898), part 3, ch. v; H. Sidgwick, Principles (1883), 
bk. i, ch. viii; F. W. Taussig, Wages and Capital (1896) and Principles 
(191 1), ch. xlvii; J. Davidson, The Bargain Theory of Wages (1898); 
H. M. Thompson, Theory of Wages (1892); S and B. Webb, Problems 
of Modern Industry (1907), ch. iii; T. N. Carver, Distribution of Wealth 
(1904), ch. iv. 

172. Nature of Wages 

Wages are the remuneration of labor. They are paid for 
the services of human beings, as rents are paid for the services 
of things. When we contrast wages with prices, we use the 
latter term in the sense of the capitalized value of commodities; 
but if by price we mean value in the market, wages are a price 
just as rent and interest are prices. The law of wages must 
be like that of rent and interest, for the law of all price is the 
same. 

Wages, however, differ in some respects from rent and in- 
terest. Interest is the price paid for the use of an aliquot 
part of a homogeneous fund, and the small discrepancies in the 

413 



414 Wages [§ 172 

interest rate at any given time and place are due to the element 
of risk. Net interest is always the same in a given market. 
Wages, however, vary with the kind of labor. The wages of 
the skilled workman are higher than those of the unskilled; 
the wages of the foreman shade into the salary of the manager. 
Interest is homogeneous, wages are heterogeneous. On the 
other hand, wages differ from rents. Rents vary from zero to 
prodigious sums: the rent of a leased railroad may be millions 
of dollars, the rent of a worn-out row-b6at may be next to 
nothing. The rents of some things may approach the vanishing 
point either because the things themselves are from the start 
of extremely little use, or because the originally valuable things 
are now fit only for the scrap heap or the junkman. Human 
beings, on the other hand, must live. The recompense of 
labor must be large enough to enable the workman at least to 
exist. Wages therefore cannot fall below a positive minimum 
which is absent in the case of commodities. Moreover, while 
wages are paid for mental as well as for physical work, the 
socially significant problem of wages is that of the manual 
laborers, and with them the gradations in labor are slight com- 
pared to those in the great mass of commodities. Hence, while 
the assertion of a general rate of rents is unmeaning, we do 
speak of a general rate of wages. It is not a general rate in the 
sense of a general or single rate of interest. But it is general 
in the sense that it varies comparatively little as between a 
substantial minimum for the bottom grade and a not very 
much greater return for the higher grades of those laborers 
whose numbers are of importance. Wages therefore in their 
social significance occupy a position midway between homo- 
geneous interest and homogeneous rents. In one sense wages 
vary like rents; in another sense there is a rate of wages like 
a rate of interest. 

There is still another sense in which we can speak of a gen- 
eral rate of wages. When values are measured in terms of 
money, we use the term general level of prices. Wages as 



§172] Nature of Wages 41^ 

well as prices may be high or low. This connection between 
wages and money leads to a distinction of some importance; 
namely, between money wages and real wages. Money wages 
are actual wages paid in money; real wages are the actual 
commodities that the money wages can buy. If prices of 
food, clothing and shelter rise faster than the price of labor, 
real wages will fall although money wages rise. The employer 's 
interest is in money wages; the laborer's interest is in real 
wages. The employer compares what he pays with the product; 
the laborer compares what he receives with his expenses. 

Wages, again, although they are undoubtedly prices, may 
yet be usefully contrasted with the prices of things. Labor is a 
commodity in the sense that everything which has a price is a 
commodity. Labor, however, is a peculiar kind of commodity. 
The chief peculiarities are four in number, (i) Commodities 
are produced for the sake of the services which they render. 
The increased supply of human beings is not due to any such 
consideration. Under slavery, where a man was a thing, 
human beings were kept for breeding purposes; but in a state 
of freedom this consideration disappears. It is true, as stated 
above (§ 26), that the poor often look forward to their children 
as so many additional supports to the family. But he would 
be rash indeed who would assert that this is the motive of the 
increase. Commodities are produced for certain ends; human 
beings are ends in themselves. (2) A commodity once in exist- 
ence continues to give its services unbidden; a laborer may 
work or not, as he lists. The commodity takes no holiday and 
does not strike. The mule and the slave respond to the lash; 
harsh treatment of the workman may diminish rather than 
augment output. (3) Labor is perishable, while many com- 
modities are durable. After the lapse of a certain time the 
laborer must sell his labor or starve. Laborers and capitaHsts 
need each other, but under normal conditions the need of the 
laborer is more urgent. (4) Finally, labor is inseparable from 
the laborer, while the commodity may be separated from its 



41 6 Wages [§173 

owner. Commodities are sold wherever the owner desires; 
labor can be sold only where the laborer is. The owner of 
commodities may stay where he likes and send his commodities 
where he finds a market; the laborer must accompany his labor 
to the market. The one is in this respect free, the other unfree. 
It is therefore not necessary to resort to obvious ethical 
considerations in order to recognize the difference between 
human beings and inanimate objects. The economic contrast 
is a result of man's personality, but it is none the less an eco- 
nomic contrast. The service of a material good is a commodity, 
and the good itself is wealth; the labor of man is a commodity, 
but man himself is not wealth. The things exist for the services 
which they afford, but man does not exist for wealth; wealth 
exists for man. The price of labor, like the price of everything 
else, is the result of economic forces, and of economic forces 
alone; but labor is such a peculiar kind of commodity that the 
economic forces are present in different proportions and thus 
affect the result differently. 

173. "Wages and Cost 

After these preliminaries we are prepared to attack the 
problem of the law of wages. The most common statement is 
that wages depend upon supply and demand. In the sense 
that all value depends upon the equilibrium between supply 
and demand, this is true enough; but unless we analyze the 
forces affecting normal supply and demand, the statement is of 
little use. In the way in which it is usually framed, moreover, 
the assertion leads to false implications. When the ordinary 
man speaks of demand and supply in reference to labor, he 
thinks only of the market variations rather than of the point 
about which the actual rates oscillate. Demand and supply, 
as commonly understood, afford a proximate rather than an 
ultimate explanation. As soon, however, as normal demand 
and supply are meant we are confronted by other causes. 

^The earliest attempt to supply this more ultimate explana- 



§ 173] Wages and Cost 417 

tion was the cost, or cost-of-production, theory of vvages. 
Market value, it was said, depends upon demand and supply, 
but in all reproducible commodities normal value is fixed by 
cost of production. Labor is a reproducible commodity, and 
therefore its value must be fixed by its cost of production. 
The cost of production of labor, however, is the cost of per- 
petuating a supply of laborers. Since the only restriction on 
population was supposed to be the bare possibility of support- 
ing life, it was held that the supply of laborers would increase 
up to this point of the minimum of subsistence for each. The 
rate of wages, therefore, always tends to be at the bare 
minimum of subsistence, and the cost-of-production theory 
becomes equivalent to the minimum-of-subsistence theory. 
Sometimes this is also called the iron law or the brazen law of 
wages, because of the assumed rigidity of the principle. 

This theory was defective in two points. In the first place in 
its identification of labor with a simple reproducible commodity 
it neglected the possibility of such an automatic check to 
population as would in any progressive community result in a 
certain higher level below which labor will not be carried on. 
Secondly, it committed the error, common to all the early 
economists, of holding that price is fixed by cost of production, 
whereas we know that the relation is more indirect. In the 
face of the constant rise of wages during the nineteenth century, 
coupled with a still greater increase of population, the mini- 
mum-of-subsistence theory of wages finally broke down. 

A variation of the same doctrine was the wages-fund theory. 
This rested upon the three premises, first, that wages are paid 
out of capital; second, that the amount of capital available at 
any given time for such payment of wages is predetermined 
and fixed; third, that the greater the number of laborers, the 
smaller the share of each. The conclusion was that since 
laborers can influence only their own numbers and not the 
predetermined amount of capital, all independent efforts to 
improve their position by collective action are futile: the 
27 



41 8 Wages [§ 174 

sole method for the laborer to increase wages is to keep 
down population. Any interference, moreover, on the part of 
government with the profits of capital will diminish the wages 
fund and thus decrease wages. As one of the more popular 
writers put it: "Labor is a commodity. If men will marry 
and bring up children to an overstocked and expiring trade, 
it is for them to take the consequences. If we stand between 
the error and its consequences, we stand between the evil and 
its cure; if we intercept the penalty, we perpetuate the sin." 

Further reflection showed, however, that each of the three 
premises of the wages-fund doctrine was vulnerable, (i) 
Wages are not paid out of capital; they are only advanced out 
of capital. They are paid out of the product. Labor, like 
capital, earns its own remuneration. They may co-operate to 
effect a certain result, but the wages are not paid out of the 
capital in any different sense than the interest or profits are 
paid out of the labor. Both are paid out of the joint product 
which they create. (2) There is no such rigidity in the avail- 
able amount of capital as is assumed. The capital applied to 
production is as susceptible of increase as is the labor force. 
Both are at any given moment elastic quantities. Increase 
the remuneration of either, and the supply will grow. (3) 
Finally, to affirm that the rate of wages is a quotient to be 
arrived at by dividing the dividend or wages fund by the divisor 
or number of laborers, and that wages hence rise or fall merely 
with the changes in population, rests not only on the error 
of considering the dividend as fixed, but upon the neglect to 
remember that the laborers make a contribution to the product 
and thus increase the sum to be divided. 

With the breakdown of both the minimum-of -subsistence and 

the wages-fund theory of wages the way was prepared for the 

modern doctrine. 

174. Wages and Efficiency 

In order to reach a consistent theory of wages we must 
revert to fundamental principles. All things possess value 



§ 174] Wages and Efficiency 41 g 

because of the services which they render. The value of all 
production goods depends on the value of the consumption 
goods. If the price of iron products falls, the price of iron ore 
will fall. Production goods, however, are composed not only 
of concrete objects but of labor. Labor, therefore, has a value 
because its services or products have a value. If the labor is 
misspent, the product is valueless, and in the long run the 
labor will be equally so. Labor secures a remuneration because 
it produces something for which people are willing to pay. 
In other words, wages depend on productivity. 

The value of labor, however, like the value of all things, is 
affected by marginal increments. If a man applies his labor 
to land which is so abundant that it can be had for the asking, 
there will be no rent of the land, and the value of the entire 
product will consist of wages. By increasing the number of 
workmen, the product may be more than proportionately in- 
creased, because the plot may be large and several laborers in 
co-operation may accomplish so much better results that the 
share of each will be greater. After the point of maximum 
utilization has been reached, however, the law of diminishing 
returns will assert itself, and each additional laborer will add 
relatively less to the product, until if <he process were con- 
tinued long enough a new laborer would make no addition at 
all. The process will never actually be carried to this point, 
since the object of activity is the attainment of some result; 
if there is no result, the activity will cease. At any given 
time, however, there is always a final or marginal workman 
who is making some contribution to the product. If there is 
free competition and if all the laborers do their allotted task 
equally well, so that there is no choice between them, the 
share of the product ascribable to any of the workmen must be 
equal to the 'additions made by the last or marginal laborer 
actually at work. Since the value of the entire product is here 
due to labor, the rate of wages is equal to the product of the 
marginal laborer. Wages depend upon marginal productivity. 



420 Wages [§ i 



74 



If, instead of operating with a given piece of land, the 
laborer were to utilize a given quantity of capital, the result 
would be the same. Suppose that the labor is applied to a 
given quantity of looms. The total product here indeed is 
not wholly due to the labor, because the looms cost something, 
whereas the land was so plentiful that it cost nothing. The 
share of the product due to the looms, however, is equivalent to 
the interest on the capital invested. If the number of looms 
remains fixed and there are no changes in the demand, each 
additional workman will add an increasingly smaller increment 
to the total product; and the share of the product at any given 
time due to the labor will, as before, be equal to the contribu- 
tion made by the workman that is employed at the margin. 
What he earns sets the standard for all the others. 

In actual life, indeed, the quantities of land and capital are 
fixed just as little as is the number of laborers. The marginal 
employment of laborers will therefore depend not alone on the 
amount of labor, but on the amount of the other productive 
factors. For these are all competing with each other. At a 
certain point in the process of increasing the number of work- 
men on a given plot of land it will be more profitable to use 
more land instead of more workmen; and as the better land 
acquires a value, a part of the product will consist of land rent. 
In the same way at a certain point it will pay better to use more 
looms, so that an increasing part of the product will consist 
of the rent of the looms or of the interest on the capital in- 
vested in the looms. Since the looms occupy space, the pro- 
duct will be divided into land rent, interest and wages. And 
if there are continual temporary changes going on, a part of 
the product will take the shape of profits to the entrepreneur. 
All this, however, although it may obscure, cannot prevent, the 
fact that there is always a point of marginal employment of 
labor, and that at this margin there is a certain part of the 
product ascribable to labor. The normal rate of wages, that 
Is, the amount to which wages tend to conform under conditions 



§ 175] Rate of Wages 421 

of fr^e competition and mobility of both capital and labor, 
is the amount of value which a given increment of labor pro- 
duces at the margin. 

175. Rates of Wages 

It may be claimed that the productivity of anything at the 
margin depends on relative scarcity. Scarcity, however, con- 
notes supply, and the supply of labor, like that of other things, 
depends on cost of production. Are we not then, after all, 
really coming back to the cost theory of wages? 

The cost theory, however, can no longer be stated as the 
minimum-of-subsistence theory. The cost of living at any 
given time is affected by the standard of life. With the pro- 
gress of civilization and the alteration of human wants, the stand- 
ard changes. The standard of the Chinese coolie differs from 
that of the American workman; the standard of the farm hand 
from that of the factory operative. When the cost theory of 
wages is couched in terms of the standard of life theory it loses 
its pessimistic connotation. For if wages vary with the stand- 
ard of life, anything which lifts the standard will raise the 
rate of wages. 

In reality, however, the standard of life cannot accomplish 
the impossible. The highest standard will not prevent wages 
from falling in the face of a decrease in the demand for the 
product and a decline in industrial prosperity. If the em- 
ployers cannot sell their product at a given price, they must 
lower cost or abandon the business. From this point of view 
the cost of labor is like the cost of anything else; it must adjust 
itself to the price. As was said by Longfield three-quarters 
of a century ago, the wages of the laborer depend upon the value 
of his labor and not upon his wants. 

The standard-of-life theory and the productivity theory may 
thus be declared complementary. They are both true in the 
sense that the cost and the utility theories of value are trueo 
But while marginal utility tends to equal marginal cost, we 



422 Wages [§175 

know that the ultimate explanation of value is to be fouijd on 
the side of utility and that marginal cost adjusts itself to mar- 
ginal utility. Cost seems to be ike cause of value, but is in 
reality a measure rather than a cause. So, in the same way, 
marginal productivity (that is, marginal efficiency or utility) 
is the causa causans of the rate of wages, while the standard of 
life (or marginal cost), which seems to be cause, in reality 
adjusts itself to the productivity. The rate of wages may be 
expressed in terms of either,^ but the positive force is productivity. 
The standard of life, however, is of exceedingly great im- 
portance. It oftens serves as a dyke to prevent for a time at 
least the inundation of the field. It is here that the contrast 
between men and things is apparent. With ordinary com- 
modities, a new-comer who can produce the same goods at 
lower cost will reduce the price. With labor, if the cost, that 
is, the standard of life, has become a customary one, the new- 
comer will not be so apt voluntarily to submit to a lower stand- 
ard. To the ordinary producer low cost of the product means 
high gains; to the laborer low cost of the product, that is, low 
wages, means low gains. It is only where the new-comers are 
habituated to a lower standard and where the exigencies of the 
situation force them to accept the smallest sum the employers 
will give, that the real difficulty arises. Thus women's wages 
are frequently lower than men's, not only because in some oc- 
cupations women produce less than men, but also because, even 
where the product is the same, the woman's standard of life is 
lower, in that she is generally not the support of the family 
and is often not entirely dependent on her earnings. In the 
same way the immigrant receives lower wages than the native 
workman, not only because his contribution to the product is 
frequently less through ignorance or lack of skill, but because 
his standard of life is so much lower that he will be willing 
to work for less — at least until he becomes educated up to 
the new standard of life. 



§ 176] Course of Wages 423 

176. Course of "Wages 

Since wages are fixed by the value of the marginal incre- 
ment of labor employed, changes in the normal rate of wages 
depend upon changes in the location of the margin. These 
changes may take place on the side of labor or on that of the 
other factors of production. 

Anything which tends to enhance the productivity of labor 
in itself will increase the product of the marginal unit and thus 
raise the rate of wages. Education, the development of mental 
and moral vigor, energy and application — in short, all those 
qualities which differentiate advanced from low-grade com- 
munities — tend to raise wages because they increase product. 
So far as governmental action or labor organizations succeed 
in lifting this plane of efficiency they also contribute to the 
rise of wages. From this point of view the standard of life 
acquires an additional significance, because of the reflex action 
of the standard itself upon the efficiency of the laborer. The 
better the man, the more valuable his work. On the other 
hand, the margin may be affected by changes in the other fac- 
tors of production. For instance, when land is relatively 
plentiful as compared to labor, the margin is high. In all new 
countries land rent is small, population sparse, and the return 
to labor abundant. In proportion as land becomes scarcer or 
less fertile, wages tend to fall relatively to land rent. Per 
contra, when new sections are opened by colonization or immi- 
gration, the tendency is for rent to fall and wages to rise. If 
land were the only other factor to be considered, it would be 
true that land rent tends to rise at the expense of wages. 

Land, however, is not the only factor. As the supply of 
capital becomes more copious, the joint product of capital and 
labor rapidly increases. With the growth in the supply of 
capital the rate of interest tends to fall. When the rate be- 
comes as low as in modern industrial communities, there is 
such a perpetual and prodigious renewal and multiplication of 



424 Wages [§ 176 

capital that the productivity of the marginal laborer will con- 
stantly augment. Instead of working with no tools or poor 
tools, he will have at his disposal ever better implements 
and finer machinery. Yet these better tools and finer ma- 
chinery will cost constantly less. The product will be larger, 
and the part of the joint product to be ascribed to capital 
will be relatively smaller. Wages, in other words, will tend 
to rise. 

Where both these forces operate simultaneously the result 
depends on their reciprocal influence. In early stages of eco- 
nomic development, as in some of our Western states, both 
wages and interest fall while land rent rises. In the older 
and industrially progressive sections, on the other hand, the 
increase of capital may overbalance the relative scarcity of 
land, and although land rent will rise, the total product will 
increase so much more rapidly that wages will rise as well. 
Wages in the great industrial establishments of New England 
have increased during the last half-century, despite the growth 
of land rents. Capital tends to raise the marginal contribution 
of the laborer, because it adds to his efficiency, that is, to his 
control of the powers of nature. 

There exist in all the important countries ample statistics to 
show the advance in real wages since the early stages of the 
capitalist system. We shall content ourselves with reproducing 
in the table on page 426 the figures for the United States since 
the Civil War. These disclose the striking fact that real wages, 
that is, the amount of commodities that can be bought with the 
money wages, have risen more than 100 per cent in industry 
and more than 70 per cent in agriculture. In other words, 
notwithstanding the practical exhaustion of the free lands and 
the rise in land rents, wages have increased so that the labor- 
ers enjoy a continually greater command over the conveniences 
of life. There could be no more eloquent testimony to the 
power of the modern industrial system to enhance the welfare 
of mankind. We also add (opposite page 424) a chart show- 



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WAGES ) 

HOURS OF WORK ( RELATIVE FIGURES. 1890 TO 1907: UNITED STATES 
NUMBER OF EMPLOYEES ( [AVERAGE FOR 1890 TO 1899=100.] 
RETAIL PRICES OF FOOD / 
















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§177] Variations in Wages 425 

ing the relation of wages to hours of work in the United States, 
as compared with prices of food, from 1890 to 1907. 

177. Variations in "Wages 

Actual wages differ from normal wages thus far considered 
in three respects. The variation may be due to market in- 
fluences, to the nature of the occupation, or to the conditions 
of equality as between the giver and the recipient of wages 
in the same occupation. 

(i) Market variations need not detain us long. Like all 
market prices, wages in every-day life are the result of ephem- 
eral changes. While of the utmost importance to the prac- 
tical business man, the market oscillations do not lend 
themselves to any detailed analysis. In brisk times, when 
the temporary demand increases faster than the supply, wages 
advance and vice versa. Farm hands secure higher pay at 
harvest time: factory operatives must choose between lower 
wages or less work during a period of great temporary depres- 
sion. These facts are so obvious as to need no elaborate 
explanation. 

(2) The inequalities may be due to the occupations them- 
selves. We do not here indeed deal with market wages, but 
the wages are normal only within each occupation. They are 
particular normal wages, not general normal wages. Some- 
times the inequality is more ostensible than real. The sea- 
sonal demand may differ. In the wholesale clothing trade the 
two busy seasons are followed by the slack months; the brick- 
layer can ply his vocation only in favorable weather. The 
rate of wages for permanent workmen must be such as to equal- 
ize these differences. The high nominal day wages of the 
bricklayer may be far lower real monthly wages; the high 
weekly or monthly wages of the clothing "operator" during the 
busy season may be only moderate real yearly wages. 

Adam Smith attempted to reduce the inequalities in wages 
to five causes: the agreeableness of the occupation, the con- 



426 



Wages 



[§ 177 



MOVEMENT OF NOMINAL AND REAL WAGES, 1866-1903 
(1890 AS THE STANDARD YEAR). 







in 


^ 


1 






tn 


^ 


.r 1 






1) 


Nominal 
arm Labo 
Board). 


eal Wage 
bor (with 
rd). 




° ^ 
^1 


4J 

■&; 


Relative Nominal 

Wages, Farm Labo 

(with Board). 


eal Wages 
bor (with 
rd). 




0) "^ 

-S 1) 


Pi 3 

Pi 


Relative 

Wages, Fi 
(with ; 


Relative R 

Farm La 

Boa 




> tfl 
« to 


re 


Relative R^ 

Farm La 

Boa 




Falkner 

Nc 


s Index 

^ T 






1884 


98.5 


90.0 








)S.^ 






1885 


97.8 


98.2 


99 


I 


99-5 


1866 


68.5 


47-9 


100. 3 


70.0 


1886 


97.8 


98.1 








IS67 


73-7 


56.0 






1887 


98.6 


97.8 






.... 


1868 


72-3 


53-9 






1888 


99.2 


96,6 


99 


3 


96.7 


IS69 


75-2 


52-7 


98.0 


81.8 


1889 


99.6 


94.8 










25 Occii 


3ations.2 








Bureau of Labor,4 








City \ 


Vages. 








519 Occupations. 






1870 


87-3 


68.7 






rSgo 


1 00.0 


1 00.0 


100. 


loo.o 


I87I 


94-7 


72.2 






1891 


99-7 


98.4 




. 


.... 


1872 


97.0 


74-9 






1892 


100.3 


100.8 


100 


7 


lOI 2 


1873 


93-2 


76.3 






1893 


100.2 


98.3 


:o6 


7 


104.7 


1874 


gr.i 


73-2 






1894 


96.7 


99.4 


97 


7 


100.3 


1875 


88.7 


72.5 


90.S 


74-3 


1895 


97-4 


102.0 


96 


5 


lOI.O 


1876 


86.3 


74-4 






1896 


98.5 


105-7 






.... 


1877 


88.8 


77-8 






1897 


98.2 


104.5 






.... 


1878 


9^-3 


82 9 






1898 


99.0 


102.7 


107 


9 


III. 9 


1879 


91.8 


905 


83.8 


82.6 


1899 


100.2 


103. 1 


"3 





1 16. 3 


1880 


92.6 


82.8 






1900 


303.1 


104.5 






.... 


I88I 


95-3 


82.4 






1 901 


104.8 


102. 1 




. 


.... 


1882 


96.9 


83.3 


99-7 


85*7 


1902 


108.2 


100. 


131-7 


121. 6 


IS83 


97-7 


85-9 




.... 


1903 


III. 2 


103.2 




.... 



1 Unweighted averages of wages in 21 industries, from Senate 
(Aldrich) Report on Wholesale Prices ^ Wages and Transportation, p. 180. 
All wages in this table are on the gold basis, and all real wages, down to 
1889 are based upon Falkner's weighted index numbers of prices, from 
the same report, p. 100. The meaning of the terms weighted and un- 
weighted are explained below (§ 189). 

2 Unweighted averages covering 1 2 important cities, from Bulletin of 
the Department of Labor, No, 18, p. 669. 

^ Weighted averages of monthly wages, reduced to gold basis, com- 
piled from Bulletin No. 26, miscellaneous series, United States Depart- 
ment of Agriculture, p. 15. 

^ Weighted averages of weekly earnings from Bulletin of the Bureau 
of Labor, No. 53, pp. 721-723. All real wages from 1890 to 1903 based 
upon index numbers of retail prices given in this bulletin. 

This table is taken from Adams and Sumner, Labor Problems (1905), 
514. It is selected as, on the whole, the most accurate and conservative 



§ 177] • Variations in Wages 427 

stancy of employment, the ease of learning the trade, the degree 
of trust to be reposed in the workman, and the probability of 
success. In a more general way, however, it may be said 
that inequality of pay is due to inequality of work. A watch- 
maker gets more than a street-sweeper because his contribu- 
tion to the product is greater. If all units of labor were at 
least potentially equal, and if there was complete mobility, the 
street-sweepers would all become watch-makers and wages 
would stand at a level. Obviously, however, the higher the 
degree of required skill, the greater the relative scarcity of 
workmen. This scarcity may be due to four causes: a defi- 
ciency of natural talent, a lack of opportunity, the cost of 
mastering the trade, and the obstacles in the way of move- 
ment from employment to employment. The differences 
between occupations may thus be either natural or artificial; 
in either case the labor force is at any given time divided into 
what are in some respects at least non-competing industrial 
groups. 

(3) Finally, the discrepancy between normal and actual 
wages may be due to conditions of inequality. This may be 
ascribable to the fact that there is only one-sided competition, 
or that the conditions of the mutual competition are different. 
There may be a monopoly on the labor side. If any group of 
workmen can secure such a complete control of the trade that 

presentation of the facts. The authors give several warnings as to the 
use of the table: (i) In the industrial group, the figures are the results 
of three distinct investigations. The averages are not absolutely com- 
parable. But the probable error is slight. (2) Up to 1889 the compar- 
ison is with wholesale prices, after 1890 with retail prices. The effect of 
this is probably to exaggerate the relative advance of real wages for the 
earlier period. (3) Statistics of real wages are really trustworthy only in 
periods of normal prosperity. In time of depression, prices fall more 
quickly than wages, so that real wages seem to be increasing when in 
reality there is much more unemployment and a decline in the welfare of 
the laborers as a whole. Thus in 1896 the real wages seem to be higher 
than in 1892 or 1902. 



428 Wages [§ 177 

it need fear no entrance of undesired members, it can raise the 
rate of wages considerably above the normal point. In rare 
cases only is this possible on a large scale in modern times. 
When the workmen are not securely intrenched by legal priv- 
ilege, as in the later stages of the mediaeval guilds, a rise of 
wages far above the normal level in any one occupation will 
set in motion forces which will ultimately be strong enough to 
break down the artificial barriers. If the group is unduly re- 
strictive in its membership, the pressure from the outside will 
result in the formation of analogous groups, anxious to partici- 
pate in the extra gains, and ready to take over a share of these 
gains. Minor instances, however, of this temporary monopo- 
listic excess of wages are by no means infrequent. 

On the other hand, competition may be absent on the side of 
the employers. Capital monopolies, however, have even less 
opportunity of driving wages down below the normal level 
than labor monopolies have of raising them above the level. 
For even though there may be no competition within the par- 
ticular industry, there will always be the competition between 
different industries for a supply of workmen. The laborers 
are not compelled to enter the employ of the monopoly, and 
will not do so when the wages offered are lower than in similar 
occupations. In point of fact, capital monopolies do not pay 
lower wages. The American workmen in their official unions, 
as we have seen, are not opposed to the monopolies and trusts 
on the score of low wages. The really perilous effects of capi- 
tal monopoly on wages is of a more insidious kind. All mo- 
nopoly means a relative restriction of production, for the point 
of maximum monopoly revenue does not necessarily correspond 
to that of maximum competitive output and marginal competi- 
tive cost. Since wages stand in such a close relation to pro- 
ductivity, a diminution of product must finally diminish the 
amount available for the payment of wages. Monopoly of in- 
dustry is at bottom as prejudicial to the wage-earner as to the 
consumer. 



§ 178] Wages and Profits 429 

Of more importance in practical life is the divergence of 
actual from normal wages ascribable to inequality in the con- 
ditions of competition. As we learned at the outset of our 
discussion, the ability to drive a bargain varies, and a unitary 
market price can emerge only when there are complete com- 
petition and mobihty on the side of both buyer and seller. In 
the labor contract the individual seller of labor is in ordinary 
cases the weaker party. The workman is both more ignorant 
and more necessitous. He is more ignorant because, while 
the employer knows both the cost of labor and the price of the 
product, the workman is unacquainted with the details of 
the business and can only guess at his real contribution to the 
product. He is more necessitous because he cannot afford to 
wait. The machine may lie idle, and profits may cease for a 
time; but running expenses also cease, at least in part, and 
when the machine starts up, profits will follow. The laborer 
may remain idle, but running expenses, that is, cost of living, 
do not cease. If the machine stops, it still endures; if the 
workman stops, he starves. 

When therefore the individual laborer is left to his own de- 
vices, he may fail to secure his due share of the joint product. 
Advantage may be taken of his ignorance or of his necessity; 
and the example that is set by the less scrupulous employer is 
not only contagious, but also often imposes itself as a competi- 
tive condition upon others who might naturally possess more 
scruples. The result is a struggle between wages and profits 
which transfers itself to the arena of both economic and politi- 
cal life, and which creates what is known as the labor problem. 

178. "Wages and Profits 

The relation of wages to profits is thus complementary as 
well as antagonistic. They are "complementary in the sense that 
prosperity may mean both high profits and high wages. Profits, 
as we have seen, are the chief inducement to enterprise. The 
anticipated gains to be derived from fluctuations in value 



430 Wages [§ 178 

constitute the real incentive to business activity and hence to 
modern production. The hope of profits leads to the invest- 
ment and increase of capital, and to a better co-ordination of 
the factors of production, and thus under normal conditions to 
an increase of output. The increase of product is apt indeed 
to be followed by a growth of population. When the product 
increases at a faster rate than the available supply of workmen, 
that is, as long as the product keeps ahead of the population, 
wages will tend to rise. Profits are constantly exhausting 
themselves, only to be renewed in a fresh attempt to conquer 
nature. High profits are hence the best hope of high wages, 
because it is chiefly through the existence of high profits that 
mankind has any assurance of that augmented output which 
is the chief factor in raising the marginal contribution of labor. 
Profits and wages are in this sense complementary. 

On the other hand, the immediate division of the product in 
each individual case and at any given moment is largely one 
of relative power. The more that is taken as profits by any 
single employer or group of employers, the less will be available 
as wages; the more that is paid as wages, the less will be re- 
ceived as profits. In this sense wages and profits are antago- 
nistic. In good times wages and profits both go up, in bad 
times wages and profits both go down; but at all times both 
employer and employees will strive to secure the greatest pos- 
sible share of the joint product for themselves. Under condi- 
tions of frictionless competition, complete mobility and effective 
equality in bargaining, the share of each will adjust itself to the 
point of relative contribution to the product; under conditions 
of actual life each side may secure an excess at ,the expense 
of the other, and with incidental injury to the public. In 
the great majority of cases the excess goes to the employer. 
How this excess may be obviated, and this injury reduced to 
the lowest proportions, becomes therefore a matter of urgent 
concern. 

The struggle of the laborer to improve his condition has 



§178] Wages and Profits 431 

assumed four principal forms. He has sought to invoke the 
protection of the law; he has endeavored to strengthen him- 
self and his fellows by organization; he has attempted to sub- 
stitute a new principle of remuneration; he has striven on the 
basis of existing methods to effect a working agreement with 
the employers. In other words, the four phases of the struggle 
are labor legislation, labor organization, profit sharing or co- 
operation, and arbitration or conciliation. Reserving the first 
and most important phase for later consideration (chapters 
xxxvii and xxxviii) the last three will now engage our attention. 



CHAPTER XXVII 

THE LABOR PROBLEM 

179. References 

In General: Adams & Sumner, Labor Problems (1905); J. R. Co:-- 
mons, Labor and Administration (1913); Commons and Andrews, Prin- 
ciples of Labor Legislation (1916); G. Drage, Labour Problems (1896); 
G. D. H. Cole, The World of Labour (2d ed., 1915); C. L. Goodrich, The 
Frontier of Control (1920). 

Labor Organization: S. and B. Webb, History of Trade Unionism 
(1911), and Industrial Democracy (1907); F. K. Carlton, The History 
and Problems of Organized Labor (191 1); Hollander and Barnett, Studies 
in American Trade Unionism (1906); R. F. Hoxie, Trade Unionism 
in the U. S, (1917); J. R. Commons and others, History of Labor in the 
U. S. (1918); G. G. Groat, Organized Labor in America (1916); F. T. 
Stockton, The Closed Shop in American Trade Unions (1911); D. A. 
McCabe, The Standard Rate in American Trade Unions (1912); T. W. 
Glocker, The Government of American Trade Unions (1914); F. S, Hall, 
Sympathetic Strikes and Sympathetic Lockouts (1898); H. W. Laidler, 
Boycotts and the Labor Struggle (1913); L. Wolman, The Boycott in the 
Trade Unions (1916). 

Profit Sharing and Co-operation: D. F, Schloss, Methods of In- 
dustrial Remuneration (3d ed., 1898) ; N. P. Oilman, Profit Sharing (1889) 
and A Dividend to Labor (1899); Beatrice Potter [Mrs. Webb], The Co- 
operative Movement in Great Britain (1895); B. C. R. Fay, Co-operation 
at Home and Abroad (1908); C. Webb, Industrial Co-operation (1904); 
J. G. Holyoake, History of Co-operation (2 vols., 2d ed., 1906); A. W. 
Burrett, Profit Sharing (1918). 

Arbitration and Conciliation: H. Crompton, Industrial Concilia- 
tion (1876) ; L. L. Price, Industrial Peace (1887) ; A. M. Bing, War Time 
Strikes and Their Adjustment (1921); V. S. Clark, The Labor Movement 
in Australia (1906); H. Broadhead, State Regulation of Labor in New 
Zealand (1908); M. T. Rankin, Arbitration and Conciliation in Australia 
(1916). 

180. Labor Organizations 

The first step in the struggle of the laborers to secure a reason- 
able equity was their endeavor to help themselves through 
associated action. The organizations, starting within each trade 

432 



§ i8o] Labor Organizations 433 

in England during the early decades of the nineteenth century, 
became known as trade-unions and gradually assumed a national, 
and in some cases even an international, form. Where action 
involving the general interest of all unions becomes desirable, 
we find them, as in the United States, combining to form coun- 
cils or central labor unions in the cities, state federations, and 
finally national bodies like the American Federation of Labor. 
The justification of trade-unions was long disputed. Under 
the early law they were illegal as conspiracies. It was not 
until 1824 that they were legitimized in England, and not until 
much later that the free right of association was conceded else- 
where. The recognition that is to-day almost universally ac- 
corded them rests on the economic principle that in the modern 
labor contract the conditions of work have become collective 
or group conditions and that the bargaining, to be equal, must 
be collective or group bargaining. The individual workman 
is nowadays helpless against the typical employer. In a rail- 
way or a large factory, work is carried on under broad general 
rules. The laborer who forms one of a group of tens, of hun- 
dreds or of thousands of workmen cannot expect to bargain 
successfully as an individual. His only hope lies in associa- 
tion. Freedom of contract is illusory because of the self-evident 
inequaHty. The trade-union is an attempt to restore to the 
individual as a member of the group the equality which has 
been lost through the transition from small-scale to large-scale 
industry. The trade-union is as inevitable a product of modern 
economic life as the corporation. The one is an association of 
labor, the other an association of capital; both are attempts to 
attain individual prosperity through concerted efforts. 

There are two aspects to every trade-union, — the mihtant 
and the fraternal. As a fraternal organization the union seeks 
to accomplish some of the ends of the old-time guild. It insures 
the members against accident or death, it supports them when 
ill or out of work, it helps to educate them by meetings and 
lectures. More important, however, are the mihtant func- 
28 



434 Labor Problem [§ iSo 

tions, through which the union seeks to promote its industrial 
power and to increase the earnings of its members. From this 
point of view its activities may be reduced to two general cate- 
gories, — the attempt to standardize conditions of employment 
and the endeavor to restrict work. 

Under the first head must be put the effort to secure a stand- 
ard rate of pay and a normal working day. Sad experience 
has taught the laborer that if the average employer is free to 
make individual bargains with each workman he will tend to 
select the exceptional man to set the pace, and by paying him 
only ordinary wages, scale down the remuneration or overtax 
the energies of the average man, thus leading to premature 
decay and a real exploitation. To prevent this progressive 
deterioration the unions seek to secure a standard rate of wages. 
It is sometimes objected that this implies uniformity of pay- 
ment. This is not quite accurate. Wages are paid either by 
the piece or by time. In the case of piece work the more skilful 
workman will manifestly earn more. In certain trades piece 
work is preferred because, when new machinery is constantly 
being introduced or old machinery speeded up, it enables the 
workman to share in the advantage of the increased output. 
In England the unions advocate piece work in many trades; 
in America the preference is less marked, but is found in occu- 
pations like those of the shoe-workers, the weavers and some 
others. Even in the case of time work, however, which is advo- 
cated by the great mass of American unions, the uniformity that 
is sought is that of equal pay for equal work. There is little 
objection to putting the more skilful men into classes higher 
than the standard; but the standard itself must not be 
lowered. The effort is to make the standard a minimum, not a 
maximum. 

Even when the uniformity of pay seems to be that of a so- 
called dead level, it must not be forgotten that the unions are 
here following the tendency of all modern life. The essence 
of modern capitalism is, as we have seen, the standardization 



§ i8o] Labor Organizations 435 

of industry. If business enterprise depends on mass output 
and uniform production in order to improve the type, the 
laborer must not be blamed for pursuing the same end. At 
bottom the method is that of all democracy. Democracy is 
the most difficult form of government because its success de- 
pends on the high level of the mass. The path of progress 
consists in pulling the mass up to the plane of the better man, 
not in developing the aristocrat at the expense of the mass. 
Trade-unionism, like democracy, seeks here to level up, not to 
level down. 

The fixing of a normal working day seems to be in contrast 
to the standard rate of pay, because the former prescribes a 
maximum, the latter a minimum. In reality, however, there 
is no difference. In a factory all must begin and stop work 
at the same time, because all are dependent on the machine. 
If overtime is permitted, it will not be long before the employ- 
ment will be limited to those that are willing to work overtime; 
and when that occurs, the pay per hour will inevitably be 
reduced. The attempt to curtail the hours of work is really 
an attempt to raise the standard of pay. Experience has shown 
that with the introduction of machinery concerted action of the 
men will be able to extort higher pay with shorter hours. Ac- 
cording to the varying conditions in different industries, the 
normal working day is now in large parts of the United States 
as low as ten, nine and even eight hours. The maximum work- 
ing day as well as the minimum rate of pay is the result of 
an effort to standardize conditions of employment, so that the 
standard may move up instead of down. 

The success of the unions in standardizing employment is 
always beneficial to the workmen. Where the conditions are 
such that there is a real economy in high wages, it may go hand 
in hand with the ultimate interests of the employer and the 
public as well. When, however, we come to the other phase 
of trade-union activity — the attempt to restrict work — the 
matter is somewhat more complicated. 



43 6 Labor Problem [§ i8o 

This effort assumes three forms, — the claim of the right to 
a trade, the Hmitation of apprenticeship, the restriction of out- 
put. In the first place, not a few of the labor troubles of the 
present have their origin in trivial and unseemly quarrels be- 
tween the unions themselves as to who should do the work. 
These jurisdictional disputes are either (a) territorial disputes, 
due to the entrance of a new union into a given territory; (b) 
demarcation disputes, where each union claims that a particular 
kind of work on the fringe belongs to it; {c) organization dis- 
putes, where the increasing specialization of industry calls into 
being a new union which separates itself from the old, and (d) 
trade-autonomy disputes, due to the fact that some organiza- 
tions are industrial unions, comprising all the workmen in a given 
industry, while others are trade-unions including only the work- 
men in particular sections or trades within a great industry. 
All these jurisdictional disputes represent an attempt to transfer 
the old doctrine of vested interests from the domain of capital 
to that of labor. Secondly, the unions often insist on an unduly 
long period of apprenticeship, and seek to limit the number of 
apprentices, or to admit new-comers to membership only on 
the payment of high fees. Thirdly, they frequently object to 
the introduction of new machinery or new methods, and when 
this objection is overruled they seek to limit the amount of 
work to be done through the "go easy" or "ca-canny" system. 

That all these methods are in one sense indefensible is clear. 
If wages ultimately depend upon product, any effort to restrict 
product must finally act as a boomerang. Many unionists 
believe that there is a fixed amount of labor which has to be 
done; that if their union does not secure it, another will; and 
that if there are fewer members of the union, or if they all work 
less, or if there are less machines, the pay of each man will be 
higher. This ''lump-of -labor" doctrine of the workman is 
just as fallacious as the old "wages-fund" theory of the capi- 
talist and leads to equally erroneous conclusions. 

From another point of view, however, these practices do not 



§ i8i] Strikes 437 

appear so utterly reprehensible. The jurisdictional disputes of 
the unions are sometimes the result of an effort to prevent the 
standard rate in the trade from being whittled down through 
the abandonment of a substantial part of the work to those 
accustomed to a lower remuneration. The effort to restrict 
apprentices is occasionally due to the endeavor to insure ade- 
quate preparation for the trade, or to frustrate the scaling down 
of all wages to the level of the apprentices. The attempt to 
fix a maximum output may be due to the same reason which 
led to the maximum working-day, — the desire to prevent the 
"bell-wether," or "pace-maker," or "rusher," or "leader" 
from subtly reducing the standard of the average workman. In 
short, while restriction of work is in itself indefensible and un- 
economic, it may in certain cases turn out to be a form of stand- 
ardization and thus not without justification. Whether it is 
the one or the other can be determined only after a careful 
scrutiny of each individual case. The most progressive unions 
are now uncompromising foes of restriction, welcoming the in- 
troduction of new and better methods and discouraging careless 
and inefficient work. 

181. Strikes 

Such being the objects of labor organization, a word must 
be added as to the means utilized to secure these ends. As 
militant organizations the unions employ two chief methods, 
— the strike and the boycott. The strike or concerted stop- 
page of work depends for its success upon the ability of the 
strikers to prevent others from taking their place. This has 
brought them into conflict with the law. The right to strike 
has been only grudgingly conceded. At first the courts held^ 
all strikes illegal as conspiracies, then they assumed the exist- 
ence of malicious intent, next they endeavoured to distinguish 
between various kinds of motives, especially in the case of 
"sympathetic" strikes, and finally they are now tending to 
discard altogether the question of motive and to uphold the 



438 Labor Problem [§ 181 

right to strike as such. This, however, carries with it the right 
of picketing. When picketing assumes the form of peaceable 
persuasion to induce others to refrain from working, it is justi- 
fiable; when it degenerates into forcible opposition, disorder and 
wanton injury to body or property, it is clearly indefensible 
and is to be sternly repressed. 

The history of strikes during the past half-century has accen- 
tuated four facts, (i) The losses to the strikers have been 
much exaggerated. The permanent gain from a successful 
strike often outweighs the temporary loss of all strikes, includ- 
ing the failures. The real injury is the disarrangement of 
industry and its effect on the consumer. (2) With the growth 
of unionism there has been a distinct amelioration in the con- 
duct of strikes. Violence and bloodshed are now less common 
than formerly. (3) The oldest unions approve of strikes 
only as a last resort; but when once entered upon, the strike 
is deemed to be distinctly more advantageous to the laborers 
than was the case in former decades. Strikes authorized by 
the central bodies are now both more infrequent and more 
successful than unauthorized strikes. Unionism has been, on 
the whole, a conservative force. (4) The outcome of a strike 
is largely dependent on the state of public opinion, and the strike 
itself is no longer held to be a matter of private concern as 
between the employer and the workmen. The coal strike of 
1902 was won, and the New York Subway strike of 1905 was 
lost, almost entirely because the issues were so clear that the 
general sentiment favored the strikers in the one case and op- 
posed them in the other. The table opposite page 438 shows 
some results of strikes in the United States from 1880 to 1900. 
- The lawlessness that has often attended labor disputes has 
led to the use by the courts of injunctions or orders to specific 
persons to refrain from doing specific things. The peculiarity 
of the injunction consists in the fact that a violation of the writ 
exposes the guilty party to anj^ punishment that the court 
itself may choose to impose, without the usual protection of 



RESULTS OF STRIKES ORDERED BY LABOR 
ORGANIZATIONS, AND NOT SO ORDERED, 1881 TO 1900. 

BY YEARS. 



YEARS 




1881 
1882 
1883 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 
1893 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 



ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 
ORDERED 
NOT ORDERED 

ORDERED 
NOT ORDERED 



HSUCCEEDED, □SUCCEEDED PARTLY, 
From Bulletin of U.S. Bureau of Labor, No. 54 ('1904;. 



Qfailed. 



§ i8i] Strikes 439 

trial by jury. Of recent years tne injunctions issued by the 
courts have sometimes been so sweeping as to expose them to 
the charge of subordinating the personal rights of the workmen 
to the property rights of the employer. Several efforts conse- 
quently have been made to remove all suspicion of abuse of 
what is properly a justifiable process by restricting the indiscrim- 
inate use of such injunctions on the part of the federal judges. 
The better remedy, however, seems to lie in a broader economic 
training of the judges and a fuller appreciation on their part of 
all the different aspects of labor disputes. 

The most recent activity of American unionism cmmmates m 
the question of the open shop. Originally a closed shop meant 
one against which the union objected and perhaps also struck. 
When the strike was called off, the shop was declared open. Now, 
however, the closed shop means the union shop, that is, the shop 
which is closed to non-union men; the open shop is open in the 
sense that the employer may engage non-unionists. Practically, 
however, the open shop has become a shop that is open only to 
non-union men. There is, however, still much confusion because 
of the failure to distinguish between a closed shop and a closed 
union. An open union is one which will admit any competent 
man into its ranks; a closed union is an indefensible monopoly. 
No one can uphold a closed shop with a closed union; the real 
controversy turns on the question of the closed shop with an 
open union. That is the true problem of the union shop. 

In many cases the open-shop question plays no role at all, 
especially (i) where the agreements are made not with the 
individual employer, but with an association of employers, 
whereby it becomes the interest of each to prevent any infraction 
of the compact by his competitor; (2) where the agreement is 
made not only for the union men, but for all the workmen, so 
that the employer can secure no advantage by hiring non-union 
men at lower wages; (3) where all grievances of whatsoever 
nature are left to a board of arbitration. When any of these 
conditions is absent, as in the building trades or the clothing 



440 Labor Problem [§ 182 

industry, it is difficult for an open-shop union to survive, and 
the institution of the closed shop often becomes a sine qua 
non of the existence of the union. It is the same consideration 
which explains the fact that in some cases the non-union man 
is regarded with indifference and that in others he becomes a 
''scab" or "strike breaker" and is considered a traitor or ren- 
egade. In such cases the appeal of the employer to the sacred 
rights of individual liberty falls on deaf ears, because the work- 
man feels that the real liberty of his class is a result of associated 
action and that association here depends on the closed shop. 
Whether it is defensible or not can therefore be decided only 
after a careful consideration of the particular conditions. That 
the unions sometimes go too far is indubitable; that the em- 
ployers' association recently formed with the slogan of "liberty 
and the open shop " is equally extreme is no less indisputable. 
The real test in both cases is this: is the union standardizing 
rather than restricting work, and is the closed shop necessary to 
the perpetuation of the union? 

182. Boycotts 

The second practice of modern unionism is the boycott or the 
attempt on the part of the workmen to cease all dealings with 
the employer or to induce third parties to abandon business 
dealings with him. This form of ostracism is of a hoary anti- 
quity, although its modern name dates from the ostracised Irish 
land agent of 1880. 

In its negative aspect the boycott takes the form of the union 
label, which guarantees to the pubHc that the goods have been 
produced under conditions approved by the union, or of the 
white list, which contains the names of those firms especially 
recommended because they adhere to union conditions. In 
its positive aspect it assumes the form of the black list and of 
the boycott proper. The name "black list," however, is gen- 
erally appHed to the action of the employer in denouncing some 
obnoxious workman; while the analogous method on the part 



§ i82] Boycotts 441 

of the workmen is termed the "unfair" or "we don't patronize" 
list, usually confined to the publication of the names of certain 
firms. The boycott proper, which includes the unfair hst, is 
either primary, secondary, or compound. The primary boycott 
is a combination of persons to stop business dealings with any 
one. The secondary boycott is a combination to induce or 
to persuade third parties so to abandon business dealings. A 
compound boycott is a combination to coerce or to intimidate 
rather than simply to induce or to persuade, the efforts in ques- 
tion involving either technical injury or actual physical force. 
Finally, we sometimes hear of a tertiary boycott, which may be 
declared against those who continue to purchase at stores sell- 
ing "unfair" supplies. Most of the important boycotts of 
recent years have been the secondary boycotts. 

American boycotts were at one time of considerable signifi- 
cance. We are told that for some years in New York State two- 
thirds of the boycotts were successful. During the end of the 
nineteenth and the first decade of the twentieth century, however, 
the general tendency of American legislation and court de- 
cisions has been against the legitimacy of the secondary boycott, 
for two reasons. On the one hand, it is claimed that the object 
is illegal, the boycott endeavoring either (a) to injure others in 
their business or profession, (b) to restrict trade, or (c) to induce 
others to break their contract. An ancillary argument, often 
found, is that the injury is accompanied by malice or is with- 
out justifiable cause. In the second place, it is claimed that 
even if the object is legal, the means employed, such as threats, 
coercion, intimidation, violence, extortion, or misrepresenta- 
tion, are illegal. 

More recently these arguments have been seriously weakened 
by the criticism of economists and have been met by counter 
arguments by some of the courts themselves. These criticisms 
point out that most of the decisions rest on the old doctrine of 
conspiracy, which has long since been abandoned in England 
in the case of labor disputes. In the United States also the doc- 



442 Labor Problem [§ 182 

trine has disappeared so far as strikes are concerned, and there 
seems no good reason for the further maintenance of a distinc- 
tion in this respect between strikes and boycotts. Attention 
is also called to the fact that many of the practices proclaimed 
to be illegal are very generally employed in business and that 
the mere concerted refusal to deal with others violates no legal 
property right. The doctrine of malice, moreover, is objected 
to as liable to abuse and that of threat and coercion is declared 
to have been seriously exaggerated. The consequence is that 
the courts in states like New York, California, Montana, and 
Missouri, now uphold the secondary boycott, in the three former 
states even the compound boycott being declared legal. 

In positive legislation, however, the United States is only 
just beginning to follow the English precedent. In 1906 the 
Trade Disputes Act passed as a result of the famous Taff-Vale 
case, virtually legalized boycotting by providing that "an act 
done in pursuance of an agreement or combination by two or 
more persons shall, if done in contemplation or furtherance of 
a trade dispute, not be actionable, unless the act, done without 
any such agreement or combination, would be actionable." 
This position is strengthened by the provision that no suit for 
damages against a trade union or its members for an injury 
committed in behalf of the union shall be entertained by court. 
The consequence is that a boycott, so long as it does not involve 
the committing of certain specifically prohibited acts, is not 
actionable, either civilly or criminally. All the legal points 
which still play such a role in the majority of the American 
courts were thus virtually eliminated from the problem. The 
only commonwealths in the United States which up to 19 14 had 
followed the new English law were California and Maryland. 
There is every reason to believe, however, that the old doctrine 
of conspiracy will soon become as inapplicable to boycotts as 
it has now become to strikes. 

The most serious obstacle to the use of boycotts in recent 
years came from the attempt in the famous Danbury Hatters 



§ i83 ] Profit Sharing and Co-operation 443 

case to apply to labor unions the federal anti-trust law of 1890. 
In 1914, however, the Clayton anti-trust law specifically exempted 
trade unions from the operation of the act, so that the illegality 
of boycotts, if maintained, will hereafter probably depend upon 
the application of the common law or of state statute. 

An interesting problem is raised by the question as to what 
the result will be if the boycott comes to be generally legalized 
as the strike now is. That there is danger of abuse in the one 
case as in the other, is undoubted; but the dangers of abuse are 
overbalanced by the social dangers of prohibition. The same 
arguments that are now made against boycotts were formerly 
made against strikes. Nor does the experience, on the one hand, 
of England, or on the other hand of New York and the other 
states where boycotts have been virtually legalized, disclose 
any great risk of tyrannical use of the boycott. It is not un- 
reasonable to believe that when once the boycotts are legalized, 
as is now the case with strikes, the history will be largely the 
same, and that the unions will feel the increased responsibility 
which comes with greater power. The use of boycotts will 
then probably become more and more sparing, and if serious 
abuses disclose themselves, there will be ample time to remove 
them by proper legislation. 

183. Profit Sharing and Co-operation 

While wages constitute the ordinary method of recompense 
to the laborer, there are two other possible systems of industrial 
remuneration. The one known as co-operation rests on the 
elimination of the capitalist as distinct from the laborer; the 
other, which retains the capitalist but involves the participation 
of the laborer in the outcome of the enterprise, is popularly, 
although inaccurately, called profit sharing. 

We say inaccurately, because the method of participation is 
found in three forms, — as a substitute for the wages system, as 
an adjunct to the wages system and as a modification of the 
wages system. The first is technically called product sharing, 



444 Labor Problem [§ 183 

the second is known as gain sharing, while the third is the real 
profit sharing or industrial partnership. 

(i) The principal example of product sharing is seen in 
farming and is known as the metayer method or share system. 
The one party supplies the land and occasionally additional cap- 
ital, the other furnishes the labor; and the product is divided. 
We call it a substitute for the wages system, because the remu- 
neration of the tenant is not a stipulated wage but is contingent 
on the produce. Outside of agriculture, the chief instance is 
that of the fishing industry. In the Gloucester fisheries, for 
instance, when the capitalist provides the vessel, food and gear- 
ing, the ''catch" after deducting the "trip charges" {i.e. the 
cost of the ice, barrels and water) is divided equally between 
the ship-owner and the crew. This is "sharing on halves" or 
the "half lay." When the crew furnishes the gear and provisions 
as well, they get three quarters of the catch, and the system is 
called "sharing on the quarter," or the "quarter lay." Some- 
times the "fifth lay" is found. In seine fishing all of the crew 
share equally; in other cases the share of each is apportioned 
according to his catch. The fishermen prefer this to fixed wages, 
because of the intimate relation of reward and effort. When 
the fish are sighted, the most unremitting energy is neces- 
sary, and the men are unwilling to expose their rate of pay to 
the hazard of the lazy or inefiicient wage-earner. The capi- 
talist also favors the system, because it augments his profits. 
Another example of product sharing is the system of ' tribute " 
still found in the Cornish mines, where each pitch " is let 
out to that group of miners who agree to work the ground 
for the lowest sums per pound on the agreed values of the ore. 
In all such cases of product sharing the earnings of the laborers 
depend entirely on the results of their own efforts, not on the 
profits of the capitalist. Where the value of the product is 
dependent on the skill of the entrepreneur, as in ordinary in- 
dustry, product sharing is inapplicable. 

(2) The next form of participation recognizes the perma- 



§ 183] Profit Sharing and Co-operation 445 

nence of the wage-earner, but awards him an added compen- 
sation as an incentive to better work. This also is really not 
profit sharing, because the extra sum is independent of actual 
profits and must be paid whether profits accrue or not. It is 
called gain sharing " because both employer and wage-earner 
share in the increased gains that are presumed to ensue. Some- 
times it is caUed the system of the " progressive wage," or the 
premium payment," or the bonus plan," or, as in England, 
the " reference rate " or ' good-fellowship " system. While a 
few such experiments have met with success, they have not on the 
whole commended themselves to the American workman. For 
since the bonus plan is based upon a minimum wage with a 
premium in certain cases, the average unionist fears that what 
may be gained by some as a bonus will be more than lost by a 
reduction of the minimum. He prefers to raise the standard 
rate for all, rather than to increase the premium for some. 

(3) The final plan of participation leaves untouched the rate 
of wages, but modifies the labor contract by granting to the work- 
man some participation in the actual profits of the business. The 
laborer here receives not only wages but profits, and the sys- 
tem is hence properly called profit sharing. The division can 
be accomplished either by an annual cash dividend, or by a de- 
ferred participation in some provident fund or annuity, or by 
the distribution of shares in the stock of the corporation. The 
objects of such a system are in the highest degree commend- 
able, both as leading to increased efficiency and as conducing 
to industrial peace. But here again experience, especially in 
America, has shown that the system possesses only a limited 
efficacy. The difficulties are fourfold: (a) it requires a pecul- 
iarly broad-minded employer; (b) it presupposes a set of work- 
men who are at once so shiftless that they are not doing their 
;whole duty, and so intelligent that they realize the advantages 
of the inducement to more strenuous work; (c) it assumes the 
existence of profits, whereas the majority of business enterprises 
incur losses; (d) it complicates the wage contract by introdu- 



446 Labor Problem [§ 184 

cing another possible element of dispute in the ascertainment 
and adjustment of profits. 

While all these forms of participation rest on the continued 
existence of the capitalist, the system of industrial co-operation 
attempts to eliminate the capitalist by uniting in the same in- 
dividual the functions of laborer, capitalist and entrepreneur. 
In communities where large department stores are infrequent, 
distributive co-operation or so-called co-operative stores may 
be of some advantage to the consumer. In countries or sections, 
where credit facilities are backward, co-operative banks or 
credit associations, especially in agricultural districts, like the 
Schulze-Delitsch or Raiffeisen banks in Germany and elsewhere, 
may achieve some measure of success. In special cases a system 
of co-operative credit, like our Building and Loan Associations, 
may subserve a useful purpose. But as an attempt to replace 
the wages system or as a general scheme of social regeneration, 
productive co-operation has been attended with insignificant 
results elsewhere and with almost complete failure in the United 
States. The reasons that usually militate against success are 
fivefold: (i) the lack of adequate initial capital; (2) the scarcity 
of organizing ability; (3) the unreadiness of the average member 
to pay a salary sufficient to retain the exceptional manager; 
(4) the mutual distrust and the absence of the true co-opera- 
tive spirit; (5) the danger, in case of success, of conversion into 
the customary profit-making corporation. With human nature 
as it still is found in the ordinary man, co-operation is even less 
than profit sharing a social panacea or an immediately practi- 
cable means of escape from modern industrial evils. 

184. Arbitration and Conciliation 

The economist who is to be of any service to the statesman 
must therefore recognize human nature as he finds it. The 
avenue to industrial peace must be sought on the basis of exist- 
ing industrial methods. While the enthusiastic idealists have 
been pursuing the will-of-the-wisp of socialism and co-operation, 



§ 184] Arbitration and Conciliation 447 

the long-headed practical men have elaborated working schemes 
of slow and steady progress. These rest on the frank recog- 
nition by both parties of the utility of collective or group 
bargaining. 

Labor disputes may be adjusted before or after the differ- 
ences have reached a climax. If a strike or lockout has been 
declared, it is difficult to allay the feelings of excitement or 
resentment. In industry as in politics it is harder to restore 
peace than to preserve it. This is, however, a lesson that is 
learned with difficulty. In early communities peace {pax) 
is the short-lived compact to cease from normal hostility; in 
civilized nations the normal state of peace rests on mutual regard 
and readiness to make mutual concessions. 

In the early stages of the factory system the employer re- 
fused to recognize any but the individual workman; in the next 
stage he was wiUing to deal with representatives of his own work- 
ing force; at present he generally concedes the wisdom of trans- 
acting business with the union as a whole. At first the work- 
man granted the employer short shrift and strikes were bitter 
and violent; as the unions became more powerful they were 
sobered by responsibility; and now in many cases their chief 
function consists in averting strikes and adjusting disputes. 
In industry as in politics war is still a last resort, but in those 
occupations where strikes have become the exception rather 
than the rule, the result is due chiefly to the elaboration of the 
so-called trade agreement. The system of conciliation is one 
of joint conference; and it succeeds best where not only the 
employees but the employers are organized. The employers' 
associations, like the trade unions, are, especially in their early 
years, often intolerant, vindictive and short-sighted. But 
experience happily shows that the mere habit of conference 
between representatives of both parties tends to dispel distrust, 
to aUay animosity and to engender those feelings of mutual 
respect which are the surest guarantee of peace. In the United 
States, which began to tread the path of trade agreements at 



44 8 Labor Problem [§184 

a somewhat later date than England, recent years have witnessed 
a great strengthening of the movement toward shop councils 
and a greater participation of the laborers in the management 
of the enterprise, thus paving the way for a real democracy of 
industry. 

If the dispute has come to a head, the attempt at adjudi- 
cation is commonly called arbitration. The usage, however, is 
not uniform, for in many cases the arbiter or the board of arbi- 
tration succeeds in compounding the difficulties before they 
reach an acute stage. In the absence of an effective machinery 
within the trade, government often steps in. When it simply 
tenders its good of&ces through a system of voluntary arbitra- 
tion, as in many of the American states, its success is not 
conspicuous. When it endeavors to force the contestants to 
come to terms, as in the Australian systems of compulsory 
arbitration, the danger is that an authoritative arbitrament 
may rob the one or the other party of the freedom to develop 
a cherished ideal that may be necessary to its own successful 
growth. Yet here again the interests of the part must be 
subordinated to those of the whole, and the final test must be 
the welfare of the community. Where labor disputes and 
strikes result in a wanton and widespread social injury, as 
in the Chicago strike of 1894, the coal strikes of 1902 in Penn- 
sylvania and of 191 2 in Great Britain, and the Colorado strike of 
1 9 14, the public will sooner or later insist on some form of settle- 
ment. Voluntary conciliation through trade agreement is the 
method best suited to the temper and tradition of the American 
people, and is fortunately making rapid progress. But no amount 
of reliance on the "sacred right of free contract" wiU in the long 
run prevent society from asserting its paramount claims to the 
maintenance of industrial peace. No community will perma- 
nently brook opposition to these plain dictates of self-preserva- 
tion and social progress. 



Book IV 
Value and Exchange 

CHAPTER XXVIII 
MONEY, NATURE AND VALUE 

185. References 

W. S. Jevons, Money (1879), chs. i-xvi, xxv-xxvi; J. F. Johnson' 
Money and Currency (n, d., 1905), chs. i-viii; J. S. Mill, Principles, 
bk. iii, chs. vii-x; C. M. Walsh, Measurement of Exchange Value (1901), 
chs. iii, vi-xii; E. W. Kemmerer, Money and Credit Instruments in their 
Relation to General Prices (1907) ; D. Kinley, Money (1904), chs. v-x; W 
Ridgeway, The Origin of Metallic Currency (1892); J. L. Laughlin, 
The Principles of Money (1903); I. Fisher, The Purchasing Power of 
Money (191 1); Hartley Withers, The Meaning of Money (1909); C. A 
Corant, The Principles of Money end Banking (1905), vol. i; W. C, 
Mitchell, Gold, Prices and Wages under the Greenback Standard (1908) 
W. T. Layton, An Introduction to the Study of Prices (1920); Sir D 
Barbour, The Influence of the Gold Supply on Price, and Profits (1913) 
E. Cannan, Money, Its Connection with Rising and Falling Prices (1918). 

Index Numbers. The London Economist, March, 1864, with Annual 
Supplements; A. Sauerbeck, in Journal Statistical, Society (xhx, 1886, 
Ivi, 1893, and following years, continued after 1913 by Sir G. Paish); 
R. P. Falkner, in Senate (Aldrich) Report on Wholesale Prices. I (1893); 
Btdletin of the Department [now Bureau] of Labor, no. 39 (1902), no. 45 
(1903), and in two separate Bulletins (for wholesale and for retail prices) 
annually thereafter to the present; British Report on Wholesale and Retail 
Prices, with charts from 1801 toi903, continued to date in the Board of 
Trade Labour Gazette; F. Y. Edgeworth, Memoranda on the Best Methods 
of Ascertaining and Measuring Variations in the Value of the Monetary 
Standard (British Association Report 1887-1889); C. M. Walsh, The 
Fundamental Problem in Monetary Science (1903) and The Problem of 
Estimation (1921); W. C. Mitchell, Business Cycles (1913), ch. iv.; and 
Index Numbers of Wholesale Prices in the Bulletin of the Bureau of Labor 
Statistics, no. 173 (1915); I. Fisher, Stabilizing the Dollar (1920). 

186. Origin and Functions of Money 

The fundamental uses of money are to serve as a medium of 
exchange and to act as a measure of value. Which of these 

449 



45 o Money, Nature and Value [§ i86 

was the earlier is uncertain as well as unimportant. As soon 
as the difficulties of an extensive barter disclosed themselves, 
the employment of a commodity for the one purpose implied 
its use for the other. Value in business life is exchange value; 
when we express exchange values of all other commodities in 
terms of one, we do so with the implication that they are con- 
tinually being exchanged for it, and when they are so exchanged, 
their relative value is necessarily measured by it. 

The fundamental utility of money, therefore, is its accepta- 
bility or exchangeability. Every commodity indeed will be 
accepted by those who want it, but not by those who have no 
present use for it, and who are uncertain as to their ability to 
dispose of it on advantageous terms. All, however, are willing 
to take money, because they know that there is no doubt of 
their being able to pass it on. Ordinary commodities have a 
more or less limited acceptability; money is the one thing 
that possesses general acceptability. 

The secondary functions of money are three in number: (i) 
Money is a standard of deferred payments. When we speak 
of money as a measure of value we refer to values of commod- 
ities at a given moment. If, however, we lend something 
for a term of years, it is important that what is repaid by the 
borrower should leave us as far as possible in the same relative 
position as before. (2) Money is a store of value. If we wish 
to lay by a fund of wealth, it is important that when we want 
it again we shall be able to find it intact. Nowadays, however, 
this function of money is quite subsidiary: instead of putting 
the coin into our stockings, we place it in the bank; instead of 
hanging our gold and silver about our wives or children, we 
invest it and receive interest. (3) Money is used nowadays as 
a reserve for credit operations. Considera,ble sums must be 
kept seemingly idle when they really serve a most important 
function as a basis for credit transactions. 

Historically almost every imaginable commodity has been 
used for money. Whatever happened to be common and at 



§ i86] Functions of Money 451 

the same time widely wanted, served as money. Articles of 
food like rice, dried fish, olive oil, nuts, wheat, maize, tea, salt, 
dates, tobacco, and whiskey; weapons like knives, fire-arms, 
sword-hilts, powder and shot; implements like hoes, shovels, 
and common utensils; clothing made of wood, cotton, leather, 
skins, pelts, and furs; animals such as sheep, horses, and oxen; 
ornaments like beads, shells, ivory tusks, fish teeth, and feathers; 
and metals like iron, lead, tin, copper, and bronze have been 
employed at one time or another. Beginning in Lydia and 
^gina in classic antiquity, silver and gold were finally selected 
in every developed community to receive the government stamp 
as minted or coined money, because they possess in a peculiar 
degree the attributes of transportability, divisibility, homo- 
geneity, great value in small bulk, durability, recognizability, 
stability, and adaptability to coinage through fusibility, ductil- 
ity, and malleability. 

Money may be classified in three ways, — as actual and 
ideal money, as metallic and paper money, as standard and 
token money. 

(i) Actual money is that which actually circulates. Ideal 
money or money of account is that in which accounts are kept. 
Its use may be due to necessity or to habit. In the middle ages, 
when actual money was continually tampered with, the con- 
tinental merchants were compelled to keep accounts in scudi, 
which were not coined. Guineas are to-day unknown in Eng- 
land and shillings in America; yet sales are often effected in 
Great Britain in guineas instead of pounds, and in the rural 
districts of the Atlantic seaboard transactions frequently take 
place in shillings in lieu of dollars. 

(2) Paper money as opposed to metallic money may be sub- 
divided into three classes, - — representative, fiat, and fiduci- 
ary money. Representative money consists of paper which 
certifies that an equivalent amount of coin or bullion is depos- 
ited in the government treasury, like the American gold and 
silver certificates. Fiat money consists of paper whose value 



452 Money, Nature and Value [§ i86 

rests on the fiat or declaration of the government, like the 
American greenbacks. Fiduciary or credit money consists of 
promises issued by private or semi-private institutions to pay 
coin, like the national bank notes. 

(3) Standard money is money which is legal tender for all 
debts and used as the standard to which the value of all other 
money is referable. Token or subsidiary money, on the other 
hand, consists of coin whose legal or mint value exceeds that of 
the bullion, and whose coinage is not free, in the sense that no 
private individual is at liberty to demand that the government 
exchange his bullion for coins. 

In the United States the standard is the gold dollar of 25.8 
grains standard and 23.22 fine, although it is no longer coined.^ 
An ounce of standard gold is coined into $18. 6c^;' of fine gold 
into $20. 67!^. On May i, 1919, there were in the United States 
$3,092,430,916 of gold coin and bullion. 

Originally the silver dollar was also standard money, and 
was in fact the only coin issued under the name of "dollar," 
a corruption of the German Thaler, abbreviated from Joa- 
chimsthaler or silver coin issued in the sixteenth century by a 
petty Bohemian potentate in Joachimsthal {i.e. St. James' 
dale). In 1792 the silver dollar was fixed at 37 ij grains pure, 
or 416 grains standard silver. In 1837 the weight of the dollar 
was reduced to 412^ grains. This was henceforth known as 
the standard dollar, the previous coin being later on colloquially 
termed the ''dollar of the fathers." The coinage of the "stand- 
ard dollar" was discontinued in 1873, but again authorized in 
1878, although now without free coinage and only in exchange 
for a limited quantity of bullion purchased by the government. 
In 1890 it was provided that the silver dollar should be coined 
only when necessary to redeem the treasury notes issued under 
that law. The further issue of treasury notes, however, was 
suspended in 1893, and with their gradual retirement the need 

^ Souvenir gold dollars were coined for the St. Louis and Portland 
expositions. 



§ iSy] Value of Money 453 

of more silver dollars diminished, until with their disappearance 
the coinage of the silver dollars came to an end in 1904. The 
outstanding silver dollars are hence now in fact, although not 
in name, subsidiary or token money, because since the fall in 
the price of silver their face value is far superior to their bullion 
value, because since 1873 there is no free coinage of silver, and 
because since 1878 the silver dollars are legal tender only if 
not otherwise stipulated, and not legal tender at all for the 
redemption of the gold certificates. On May i, 191 9, there 
were in the United States 311,018,930 "standard" silver dollars.^ 
The other coins of the United States are what in official 
language are designated as "subsidiary silver" and "minor" 
or "token" coins. On May i, 1919, there was in the United 
States a stock of $243,896,606 of "subsidiary" silver. The 
"minor" or "token" coins were originally of copper. They 
are at present a five-cent nickel and a one-cent bronze coin, 
each legal tender up to 25 cents. 

187. Value of Money 

The value of money is its purchasing power, and can be 
learned only from the general level of prices. Prices of single 
commodities may rise or fall because of relative variations in 
the forces which affect particular demand and supply. But 
there can be no change in the prices of all commodities unless 
there is a corresponding change in the value of money. 

The value of money, like that of everything else, is an ex- 
pression of its marginal utility. The important point, then, is 
the location of the margin. The marginal increment is obvi- 
ously affected not only by the number of increments — the 

^ For a few years we also had a "trade doUar." The law of 1873 
authorized the coinage of a heavy silver dollar (420 grains), which it was 
supposed might be used in the Orient. It was legal tender only to $5. 
In 1876 the legal tender quality was abrogated and the coinage was lim- 
ited. In 1878 the further coinage was prohibited except for "proof 
pieces," and in 1887 provision was made for retiring the outstanding 
issue. The total issue was $35,965,924. 



454 Money, Nature and Value [§ 187 

supply — but by the amount of the work to be done — the 
demand. 

Taking up first the demand for money, it is clear that we 
must not confuse this with the demand for the commodity 
used as money. Gold and silver, for instance, are used also 
as ornaments and in the arts and manufactures. The value of 
the precious metals is therefore affected by the non-monetary 
demand, or as it is sometimes called, the industrial consump- 
tion. Confining ourselves, however, to the monetary demand 
proper, we must call attention to a widespread fallacy. It is 
sometimes said that money differs from other things in that 
the more of anything else we have, the less we want, while the 
more money we have, the more we want. This confuses money 
with general purchasing power or wealth. Everything salable 
has purchasing power. If we say that the more money a man 
has, the more he wants, we can equally well say that the more 
wheat he has, the more he wants. Yet no one would claim 
that the demand for wheat is for this reason unlimited. The 
demand for money is in fact even more limited and definite 
than that of most commodities. Wheat can be used for 
either consumption or exchange; but while gold can be em- 
ployed in industry, its use as money is primarily for exchange. 
The chief use of an ordinary commodity is to consume it; the 
chief use of money is to part with it. What the owner really 
wants is wealth, not money. 

Since the fundamental function of money is to serve as a 
medium of exchange, the demand for money can be recognized 
primarily in the volume of business. Here we meet another 
common error. It is often said that the value of money is 
measured by the total amount of commodities in existence. 
The real or effective demand for money is measured by the 
commodities actually sold. To ascertain this demand it would 
be necessary to compute the exact volume of all cash trans- 
actions at a given moment. Money, however, is needed also, 
as we have seen, as a reserve and as a store of value. We should, 



§ iSy] Value of Money 455 

therefore, have to add to the amount required for making actual 
exchanges the sums needed as reserves by the banks or govern- 
ments and the amount deemed necessary to be kept as cash in 
the pockets of the people and in the tills of the merchants. If 
it were possible to arrive at any accurate computation of these 
three facts we should know the entire demand for money. 

There is one other point in which the demand for money 
differs from that for other things. In ordinary commodities 
the demand is composed of three parts: the demand for im- 
mediate consumption, the demand for a reserve stock to be 
utilized in the near future, and the demand for more distant 
wants or for a stock "held for a rise." In the case of money, 
however, there is no potential or visible supply of money, and 
no stock that is held for a rise. People do not speculate in 
money because there are no changes in the price of money; 
because in fact money has no price. Changes in the value, or 
purchasing power, of money express themselves, not in any 
visible change in money itself, but in the prices of commodities. 

We have thus far spoken only of cash transactions. In con- 
sidering the use of money as a medium of exchange, however, 
we must not overlook the fact that many exchanges are made 
through the medium of credit. The study of credit must be 
postponed to a later chapter; but we may anticipate the con- 
clusions by stating that credit tends to lessen the demand for 
money, and thus to raise prices. The strength of the ten- 
dency depends on the degree of the actual economy in the use 
of cash. 

Changes in the monetary demand, and therefore to that ex- 
tent in the level of prices, consist of changes in the four points 
just mentioned: in the volume of business, in the amount of the 
bank reserves, in the quantity of hand-to-hand or till money, 
and in the use of credit devices. Of these the second and fourth 
will be discussed later, while the third is commonly of slight 
importance. 

The demand for money as a medium of exchange, how- 



456 Money, Nature and Value [§ 187 

ever, which is the most important constituent in the demand, 
obviously fluctuates with the extent of business transactions. 
With the warning that we must be careful not to confuse the 
volume of exchanges with the volume of production, it might be 
affirmed that, as an increase of business means a greater volume 
of transactions, the tendency will be toward a greater monetary 
demand, a rise in the value of money and a fall in general prices. 
In actual life, however, this tendency may be completely out- 
weighed by countervailing tendencies. For in the first place, 
the increasing monetary demand will, as we shall see, ordinarily 
lead to an increasing supply, so that the price level may be only 
temporarily affected. Secondly, the augmented volume of busi- 
ness will probably be attended by an extension of credit, so that 
the result may be for quite a protracted period a rise, instead of 
a fall, in prices. Since credit, however, always bears some 
relation to the supply of money, more business will in the long 
run require more money, if the price level is to be maintained. 

In short, the demand for money, like the demand for most 
things, is subject to all manner of subtle and unforeseen fluctu- 
ations. But however changeable and unpredictable the de- 
mand, it is obviously one of the two factors which fix the value 
of money or the general level of prices. 

Coming now to the monetary supply and assuming that the 
quantity of money at a given time is known, it may be asked: 
what effect do changes in the supply produce on the value of 
money or the level of prices? This question cannot be answered 
without taking account of the rapidity of circulation. By 
rapidity of circulation is meant the average number of times 
that the pieces of money change hands within a given period — 
say a year — in effecting sales. If, therefore, we centre our 
attention upon the chief function of money, — that of a medium 
of exchange, — and if we use the term "volume of transactions" 
to signify the product of the number of commodities sold, the 
number of times that they are sold in a given period, and the 
price at which the sales take place, the general law of money 



§ 187] Value of Money 457 

might be expressed in the equation: the quantity of money 
multiphed by the rapidity of circulation is equal to the volume 
of transactions in cash that are effected at a given price level. 

According to this law, if the volume of business and the price 
level remain the same, an increase in the rapidity of circula- 
tion means that a smaller quantity of money is needed; and 
per contra an increase in the supply of money means a diminu- 
tion in the rapidity of circulation. The rapidity of circula- 
tion is affected not only by the quantity of money, but by the 
other factors in the equation, — the volume of business and 
the price level. 

So far as the independent action of rapidity of circulation 
on prices is concerned, the influence is comparatively slight. 
For while communities differ greatly from one another, the 
rapidity of circulation in the same community is normally the 
result of long-continued business usages, which alter but slowly. 
It is only in sudden emergencies like panics, when business 
comes almost to a standstill, that the rapidity of circulation 
abruptly declines, with a resulting fall in prices. But even here 
it is difficult to say how much of the fall of prices is due to a 
lessening of the rapidity of circulation, how much to a dimin- 
ished supply of money (which the banks will now hoard) in 
actual circulation, and how much to a contraction of credit 
which always accompanies a crisis. 

Disregarding, then, the rapidity of circulation, it might be 
claimed that an increase in the supply of money will lower its 
value or raise the price level. In one sense it is a truism to 
state that an augmented supply of anything will lower its value. 
If, however, by this is meant that the price of anything varies 
in a precisely inverse ratio to the supply, the statement is in- 
exact, for the obvious reason that every change in supply nor- 
mally affects the demand. As Gregory King pointed out in 
the seventeenth century, wheat will rise in price considerably 
faster than the supply falls. He estimated from the crop 
statistics of a series of years that a deficiency in the harvest of 



458 Money, Nature and Value [§ 188 

one, two, three, four and five tenths would raise the price three, 
eight, sixteen, twenty-eight and forty-five tenths respectively. 
In the same way, doubling the supply of wheat will not halve 
the price. In no two commodities does a change in the supply 
exert the same influence on the price, because in no two com- 
modities is the "demand curve," which represents the elas- 
ticity of the demand, the same. A distinction may even be 
drawn in this respect between metaUic and paper money. In 
the case of paper or fiat money, where the value is due almost 
entirely to its use as money, an increase in the supply beyond 
a certain point is more directly reflected in a fall of value than 
in the case of gold or silver, which possesses in addition a value 
as a commodity, and the demand for which is non-monetary 
as well as monetary in character. 

188. The Quantity Theory and the Cost Theory 

It is obvious, therefore, that the famous "quantity theory" 
of money — the theory that the value of money depends on its 
quantity — is indefensible in this bald form. For the value 
of anything does not depend, as we know, upon supply alone 
nor upon demand alone, but is a result of the equilibrium be- 
tween supply and demand. So that in the law of money given 
above, the level of prices may be affected not only by changes 
in the rapidity of circulation as well as in the quantity of money, 
but also by changes in the volume of transactions. More- 
over, the law of money there stated, although accurate so far 
as it goes, is not exhaustive, for two reasons. In the first 
place, when we speak of "the volume of transactions in cash," 
we disregard the credit operations which also vitally affect the 
demand. Secondly, in using the same phrase, the "volume of 
transactions" does not include the functions of money as a re- 
serve and as a store of value. These were discussed under the 
head of demand for money, and properly so, because the needs 
of the community for money to serve these ends is distinct from 
its need for money in making actual exchanges. But they 



§ i88] Quantity and Cost Theory 459 

might also have been discussed under the head of supply of 
money in so far as the amount of money resting in the pockets 
of the people in between actual sales or stored in the reserves 
of banks and governments must be added to the quantity em- 
ployed in making actual exchanges in order to arrive at the 
entire supply of money in existence. From this point of view, 
therefore, the quantity of money which directly influences 
prices is primarily the quantity employed in making actual 
exchanges, that is, the entire amount of money in existence 
less the sums utilized as a reserve or as a store of value. The 
more comprehensive law of money, then, may be summed up 
in the .equation: the supply of money (less the sums used as a 
reserve and a store of value) multiplied by the rapidity of cir- 
culation is equal to the volume of exchanges in cash (as modi- 
fied by the credit transactions) effected at a given price level. 

While the quantity theory of money is therefore untenable 
in its crude form, it may nevertheless be employed to mean 
that, in the absence of relative changes in the other factors, a 
variation in the quantity of money will produce a change in 
the price level. In this sense the "quantity theory" is only 
an elliptical way of stating the ordinary law of demand and 
supply. There is an additional defence for the "quantity 
theory" in this sense, because when we come to examine the 
really controlling factors over long periods of time, we find that 
the emphasis can well be laid on the supply side, and especially 
on the quantity of money. Thus the revolution of prices in 
the sixteenth century was due to the discovery of the Ameri- 
can silver mines; the fall of prices from 1873 to 1896 is ascrib- 
able to the fact that the output of gold did not keep pace with 
the increase of population and business; and the great rise of 
prices from 1896 to the year 19 14 is due to the immensely 
augmented production of gold. But on the other hand the 
gold discoveries of 1849-50 in California and Australia, as we 
shall see in § 193, did not lead to a proportionate rise of prices 
because, in part at least, of the somewhat fortuitous concur- 



460 Money, Nature and Value [§ 188 

rence of a vastly increased demand for money. And for shorter 
periods, the influence of the mere quantity of money on prices 
is frequently outweighed by changes not only in the rapidity 
of circulation, but more especially in the various factors that 
make up the demand for money. 

Sometimes it is stated that the value of money depends 
upon its cost of production. This does not, however, involve 
any new principle. The only difference between money and 
other commodities is that the influence of cost of production 
upon the supply, and hence upon the value, of money works 
itself out more slowly. 

The value of money, it must be remembered, is not due 
to the value of gold any more than the value of iron beams 
to that of iron ore. On the contrary, just as the value of iron 
ore is due to that of iron beams (and other iron products), so 
the value of gold bullion is due to the value of gold money 
(as well as of gold used in the arts). Just as the value of any 
reproducible commodity tends to adjust itself to the point of 
marginal cost, so the value of money tends to adjust itself to 
the marginal cost of the money commodity. A decrease in the 
expense of mining, such as that which has been effected by the 
modern cyanide process, renders possible a far greater output. 
Since the precious metals, however, are exceedingly durable, 
this annual increment forms only a small fraction of the entire 
available supply, and will not produce any immediate change 
in value. In 191 2, for instance, the annual production of gold 
was 466 and that of silver 138 millions of dollars, while the 
world's stock exclusive of China was estimated at 8,481 and 
3,132 millions respectively. While fluctuations in particular 
prices are often sharp and sudden, because of the insignificance 
of the stock on hand as compared to the quantities that can be 
produced at an altered cost, the variations in the general price 
level due to changes in the cost of money are far more gradual. 
Sooner or later, however, an alteration in the rate of annual 
increase will make itself felt. A lower cost of production of 



§ 189] The Price Level 461 

money may hence be said to raise general prices, in so far as it 
augments the quantity of the money commodity. The cost-of- 
production theory thus resolves itself into the quantity theory. 

189. The Price Level 

The level of prices may be affected by impulses starting 
from the side of commodities as well as from that of money. 
The price level in China differs from that in America. In 
Athens, in the time of Pericles, money was worth at least three 
times as much as to-day; in America a century ago the pur- 
chasing power of money was far greater than at present. The 
explanation is to be sought in the general conditions of demand 
and the circumstances of cost. Modern industrial methods 
lead to vast and varied consumption, to more efficient produc- 
tion and to higher wages. The greater command of wealth 
and the lower real cost to society are, however, accompanied 
by the higher money prices that go with the augmented wages. 
In other words, the general price level tends to rise; that is, 
more money is needed to effect the exchanges. This can, how- 
ever, come about only if there is an increased supply of money 
which adjusts itself to the newer price at a lower cost level. 
Thus, while diversified demand, augmented consumption and 
mass production set in motion an increase of prices, they must 
be accompanied by a reduction in the relative cost of producing 
or acquiring the money commodity, if the rise is to be perma- 
nent. This is what happened in Germany a generation ago, 
and what is happening on a far greater scale in Japan at present. 

Because of the fact that values of commodities as well as of 
money itself are constantly changing, it is not always easy to 
measure with precision the variations in the purchasing power 
of money. The best expedient is that suggested by Evelyn 
in 1798, by Lowe in 1822, by Scrope in 1833, and by Porter in 
1836, but elaborated by Jevons in 1863, and known as the in- 
dex number. Here the price of an article at a given time, or 
its average price during a given period, is taken as a basis and 



462 Money, Nature and Value [§ 189 

called 100. If at the next selected date the price has risen 
one-tenth, it would be assigned the figure no. By choosing 
a number of different articles and taking the average of the 
figures as they vary from the base line of loo, we reach the index 
number. 

The percentage of change in the value of money is obviously 
not the same as the percentage of change in the general price 
level. If general prices double, that is, if the index number in- 
creases from 100 to 200, each unit of money will buy only half 
as much as before, or, in other words, the value of money will 
fall one-half. A rise of prices of 15 per cent, or a change in 
the index number from 100 to 115, during one year means 
that the purchasing power of 100 cents at the end of the year 
is 115 or 86.95 P^^ cent of its purchasing power at the begin- 
ning. This is equivalent to a loss of 13.05 per cent. A rise 
of 15 per cent in the general price level thus equals a fall of 
13.05 per cent in the value of money. The change in the in- 
dex number shows the alteration in the price level; the change 
in the reciprocal of the index number shows the change in the 
value of money. 

The utility of the index number depends partly on the number 
and choice of commodities, partly on the decision to use retail or 
wholesale prices, partly on the kind of average employed. 

(i) It is obvious that the larger the range of commodities 
selected, the less will be the chances of error arising from 
sudden fluctuations in the price of any single one. Even if 
we take a large number of ordinary articles, however, there 
still remain two important classes as to which it is exceedingly 
difficult to quote accurate price lists. One is the price of real 
estate, or house and land rent; the other is the price of labor, or 
general wages. The almost universal exclusion of these catego- 
ries undoubtedly impairs the accuracy of the index number. 

(2) While there is a general correspondence between whole- 
sale and retail prices, there is no precise relation. It is well 
established that retail prices fluctuate less than wholesale prices, 



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§ 189] The Price Level 463 

because they are more dependent on custom and not so read- 
ily altered. This is apparent from the charts opposite pages 
462 and 463. Since it is impracticable to compute the pro- 
portion of retail to wholesale transactions in various commodi- 
ties, the index number must be confined either to the one or 
to the other, with a necessarily resultant lack of precision as to 
the actual purchasing power of money in all transactions. 

(3) The ordinary average is the arithmetic average, where 
the figures representing the variation from the base line of 
100 are added together, and the aggregate is divided by the 
number of commodities used. This average tends, as can be 
easily calculated, to exaggerate the influence of rising prices. 
As a consequence, statisticians often utilize the so-called geo- 
metric average which is found by multiplying a number of 
quantities and extracting a root equivalent to that number. 
Sometimes to secure still greater precision, use is made of the 
harmonic average, or the reciprocal of the arithmetic average of 
the reciprocals of the quantities. Finally there is still another 
choice, known as that between the simple and the weighted 
average. Weighting means assigning to each article an im- 
portance proportionate to the amount sold or to some other 
criterion which distinguishes one commodity from another. 

In practice, however, it has been found that there is not 
enough difference between these various methods seriously to 
impair the value of the result, which can at best only be ap- 
proximate. The most familiar index-numbers are those of 
Messrs. Jevons, Palgrave, Soetbeer, Sauerbeck, Dun-Gibson, 
Bradstreets, the London Economist, the Board of Trade and 
the United States Bureau of Labor. ^ Without their use it is 
virtually impossible to make more than a mere guess at the 
rise or fall in the general price level. It will be of interest 
nevertheless to append opposite page 466 a chart showing the 

1 For an explanation of the earlier index numbers see the Bulletin of 
the Department (now Bureau) of Labor, no. 39, 1902. For the later ones 
see the same Bulletin, no. 181 (1915) and no. 226 (1917). 



464 Money, Nature and Value [§190 

changes in the general price level for the last quarter of the 
century in the United States as compared with Great Britain 
and Germany. 1 In the chart following page 464 will be found 
the changes in the price level in England from 1790 to 19 13, 
showing the great extremes of a century. In the table opposite 
page 467 we give the index numbers of wholesale and retail prices 
of food for the United States from 1890 to 191 2, showing the 
great depression culminating in 1897, and the remarkable rise 
thereafter .2 Finally, in order to bring the facts down to date 
we add in the table opposite page 468 the index numbers of 
wholesale prices from 1914 to 1919 in the United States, Great 
Britain and France, showing the striking influence of the Great 
War.3 

190. The Distribution and Stability of Money 

Variations in the price level are not uniform or instantaneous 
over the whole economic field, but propagate themselves in 
waves from commodity to commodity and from country to 
country. When, for instance, a miner brings in his gold dust 
or nuggets, he deposits them in the nearest sub-treasury, taking 
in return cash and bank drafts. A part of this he may spend 
on articles which for that very reason tend to rise in price. 
But most of his annual output will be deposited in the banks, 
whose reserves are thereby increased to such an extent that 
they will send the funds to New York to be loaned on call on 

^ Based on an article by R. H. Hooker in the Journal of the Royal 
Statistical Society, vol. 75, pp. 1-50. 

2 Bulletin of Bureau of Labor. The base of 100 in each case is the aver- 
age price for the years from 1890- 1899 inclusive. The index number of 
wholesale prices is based upon 258 representative staple commodities. 
The wholesale prices of tood are based on 54 articles, the retail prices 
on 30 articles of food. In the case of retail prices the weighted average 
is used. 

^ In this table the index numbers are expressed as percentages of the 
index numbers for 1913. 



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. OF PRICES IN ENGLAND, 1790 TO 1920 










































1 1 




JRES REPRESENT JEVONS' AVERAGE OF 40 COMMODITIES 
























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§ iQo] Distribution of Money 465 

the exchanges for transactions in securities as well as in cotton 
and wheat. The lower rates for "money" will tend to increase 
the dealings in, and the prices of, the great speculative staples, 
while the higher prices of railroad securities and industrials 
will tend to augment the demand for railroad supplies and the 
raw materials of industry. Gradually the banks will increase 
their loans to the ordinary merchant, thus stimulating the 
demand for commodities and ultimately for labor. It is largely 
for the reason that they are more amenable to speculative 
influences that, in a period of rising prices, as Cairnes pointed 
out, crude products rise more than manufactures and animal 
more than vegetable products, while wages are almost always 
the last to advance. A broader generalization, however, would 
be that the rise in prices is noticeable first in stocks and bonds, 
then in speculative staples, next in ordinary commodities, 
then in retail prices, and finally in labor and land. The same 
progression could easily be shown in the case of falling prices. 
In the meantime, however, the perturbation of prices is 
transmitted from country to country. The distribution of 
metallic money is in large measure the result of international 
forces. Some commodities have an international, others only 
a local, market; the price level in each country is a result of 
both considerations. Every nation will, under normal condi- 
tions, secure enough money to preserve this relative price 
level. If there is an abnormal increase in the quantity of gold 
in one country, it will tend to produce higher prices, augment- 
ing imports of commodities and exports of gold until the 
equilibrium is restored at a somewhat higher level. The pro- 
cess may indeed be retarded by various influences. If the 
increased supply of gold comes from the mines, it may be ex- 
ported at once, or it may go to the bank reserves and flow out 
under general banking operations without at once sensibly 
affecting the general price level. Or the international trans- 
actions may take place in securities rather than in commodi- 
ties. Or, finally, through the intervention of credit transactions, 



466 Money, Nature and Value [§ 190 

there may be a temporary change in prices unaccompanied by 
any movement of gold. As the prices of securities, however, 
are uhimately dependent on the price level of commodities, 
and inasmuch as all credit rests at bottom on the basis of 
coin, there can be no long-continued disarrangement of the 
equilibrium without setting in motion the forces working for 
its reestablishment. 

The equilibrium is one between relative price levels, which 
is only another way of stating the relative amounts of metallic 
money in each country. Any sudden alteration in the use of 
credit devices will exert its temporary effect; but in the long 
run there is a correlation between the price level and the 
money supply. Under healthy fiscal conditions, that is, when 
the currency is on a metahic basis, the amount of money in 
any country will be self-regulative and adequate to maintain 
the relative price level. 

Since the purchasing power of money is reflected in the level 
of prices, an appreciating standard is equivalent to lower prices 
and a depreciating standard to higher prices. The instabihty 
of the value of money leads to important results. 

If the standard appreciates, that is if prices fall, because the 
supply of money does not keep up to the demand at the old 
level, the first consequence in countries like the United States, 
at all events, is apt to be noticed in the stock market. As the 
bank reserves decrease, because of the relatively decHning sup- 
ply of money, the banks call in their loans, and interest rates on 
call loans are apt to increase for a time. Speculators first in 
securities and then in staple commodities tend to sell their 
holdings at a sacrifice, and there develops what is called a 
"bear" market. As the fall in prices reaches general indus- 
try, profits are curtailed in some businesses and enterprise 
slackens. Raw materials are indeed cheaper, but the manu- 
facturers cannot market their goods at satisfactory figures and 
lose money. With the falling off in the demand for new capi- 
tal, interest rates in general will finally fall. 



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§ igo] Distribution of Money 467 

Thus the farmer, the merchant, the manufacturer and the 
banker all in turn suffer from the falling prices and the ''bad 
times" are ushered in. No one realizes that the trouble is 
due to any general change in monetary conditions, but all 
ascribe the depression to over-production or other special 
causes. It might seem that the laborers are relatively better 
off, because their wages are the last to fall. But in reality the 
lack of prosperity affects them equally, because the employers 
either lay off part of the laborers or work on half time. The 
professional classes suffer because of the decline of business. 
Borrowers are embarrassed because they must work harder to 
pay back an equivalent sum of money. Owners of land and 
of corporate shares will get less rent and less dividends. There 
are only two classes who do not suffer, — those in receipt of a 
fixed income, like teachers and government officials; and bond- 
holders (as distinct from stockholders), who, receiving a fixed 
sum while the general rate of interest is falling, will see the 
capital value of their bonds appreciate. In the main, however, 
the "bad times" are general. 

A depreciating standard, or a rise in prices, such as that 
which the world has witnessed from 1896 to 1914, produces 
the opposite effect. Some classes are benefited, some are 
injured. If the gold is produced in the country, as in the 
United States, the increasing supply will swell the bank reserves 
and for the time reduce the rate of interest on call money, 
benefiting borrowers, and tending to produce a ''bull market" 
by putting up the price of stocks. If the increased supply of 
gold comes into a country in return for extra exports to the 
gold-producing countries, the effect on interest will be slighter 
at first, and that on prices more immediate. In either case, 
however, stocks and speculative commodities rise in price. 
Debtors benefit, because they have to work less to repay their 
obligations. On the other hand, the salaried and wages 
classes find it difficult to subsist on their accustomed stipends, 
and there is a concerted movement looking to the demand for 



468 Money, Nature and Value [§ 190 

increased wages, which with real estate are the last to rise. 
But profits increase with the rising prices, and the resulting 
activity in business will not only increase the demand for raw 
materials and thus the gains of the farmer, but will also aug- 
ment the demand for new capital, and thus tend ultimately to 
raise the rate of interest and to increase the prosperity of the 
financial sections of the community. But with a rise in 
interest, the price of bonds will fall. In the main, however, 
the community feels itself prosperous, and the danger now is 
that production may be artificially stimulated and that the 
result may be a speculative mania culminating in a crisis. 

Thus both rising and falling prices create an unstable equilib- 
rium which means disturbance in industry and unequal gains 
or losses to different classes. It is not high or low prices as 
such which do the harm, but rising or falling prices. 

While many factors influence the value of money or the level 
of prices the one of chief importance in time of peace is the out- 
put of the precious metals used as money. The figures will be 
found opposite page 476. Between 1570 and 1640, with the 
enormous new supplies of silver from America, prices rose from 
200 to 300 per cent, constituting the famous "Revolution of 
Prices." In the nineteenth century we have had several cycles 
of severe fluctuations. Between 1790 and 18 10 prices rose about 
80 per cent as a result of the wars; between 18 10 and 1850 they 
fell about 60 per cent, the supply of silver being cut off by the 
political disturbances in South America, and that of gold not 
increasing sufficiently to keep pace with the expanding industry. 
From 1850 to i860 came a rise of prices of about 20 per cent, 
due to the gold discoveries. That the rise was not still greater 
is due partly to the drain of silver to India, but chiefly to the en- 
larged demand for money which accompanied the increase of 
business transactions, resulting from the revolution in the media 
of transportation. From i860 to 1873 the price level remained 
relatively stable, rising considerably, however, from 1870 to 
1873, owing to the speculation which culminated in the crisis 



WHOLESALE PRICES 1913-1921 
(BASES ARE THE INDEX NUMBERS FOR 1913) 



1913 

JAN. 


1914 

JAN. 


1915 

JAN. 


1916 

JAN. 


1917 

JAN. 


1918 

JAN. 


1919 

JAN. 


1920 

JAN. MAY 


1921 

JAN. MAY 


















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§190] Distribution of Money 469 

of 1873. From 1873 to 1896 prices fell almost 60 per cent, as 
a result of the relative diminution in the output of gold. Since 
1896 the prodigious increase in the production of gold has caused 
another era of rising prices which by 19 14 amounted to almost 
60 per cent. Then came the Great War with a further increase 
of over 100 per cent by 19 19. 

These fluctuations in the price level have only recently been 
recognized as an evil. No practical method has yet been dis- 
covered to reduce them to a minimum. Perhaps the best- 
known proposition is that of the so-called multiple or tabular 
standard.^ The unit of measure would here be the aggregate 
price of a number of commodities, whose values might be reached 
by a method of index number. Even, however, if such a sys- 
tem were practicable, — a fact open to the most serious ques- 
tion, — it may be impugned on the ground that for short-time 
debts it is not needed, and for long-time debts there is no assur- 
ance that the two parties will be put in a more equal position 
than if ordinary money is used. With all its shortcomings, 
therefore, the gold standard seems to be the one which involves 
the least injustice to both. Until, therefore, a more practicable 
scheme is devised, it is altogether probable that the business 
world will have to content itself with a money unit which, like 
the gold standard, is exposed to the inevitable fluctuations in 
value that are incident to all articles of human desire and that 
are so largely influenced by the bounty of nature. 

^ Many other standards have been proposed. Walsh, who has de- 
voted an entire volume to this topic, sums them up in The Fundamental 
Problem in Monetary Science, part 4, as the commodity, wages and 
cost standards. Edgeworth, in pp. 162-164 of his Report of 1889, 
discusses them as the capital, consumption, currency, income, in- 
definite production and wages standards. Kinley, Money, ch. xiii, 
mentions the labor time, labor cost, disutility of labor, marginal utility, 
total utility and purchaser's surplus standards. Professor Irving Fisher 
in The Purchasing Power of Money (191 1) has championed a somewhat 
analogous, but not very practicable, international scheme. 



CHAPTER XXIX 
MONEY, PRACTICAL PROBLEMS 

191. References 

J. F, Johnson, Money and Currency (n. d., 1905), chs. ix-xvii; F. A. 
Walker, Money (1878), parts i and ii; J, S. Nicholson, Principles (1901), 
bk. hi, chs. xi-xiv; H. White, Money and Banking (4th ed., 191 1), 
parts i and ii; W A. Shaw, The History of the Currency (1896); H. G. 
Moulton, The Financial Organization of Society (1921); A. B. Hep- 
burn, A History of Currency in the U. S. (1915); H. P. Willis, History 
of the Latin Monetary Union (1901) ; H. B. Russell, International Monetary 
Conferences (1898); A. D. Noyes, Forty Years of American Finance (1909) 
and Financial Chapters of the War (19 16); S. P. Breckenridge, Legal 
Tender (1903); W. C. Mitchell, A History of the Greenbacks (1903); Count 
Masayoshi, Report on the Adoption of the Gold Standard in Japan (1899); 
United States Commission on International Exchange, Reports on the 
Introduction of the Gold Exchange Standard into China, etc. (1903 and 
1904); E. W. Kemmerer, Modern Currency Reforms (1916); J. M. 
Keynes, Indian Currency and Finance (1913). 

192. Coinage Problems. Seigniorage and Debasement 

The term free coinage is employed in two senses. If the 
government makes no charge for converting bullion into coin, 
the coinage may be said to be free. On the other hand, 
free coinage may mean the right of any owner of bullion to 
have it converted into coin. When we commonly speak of 
the free coinage of silver we employ the term in this second 
sense. The real distinction that ought to be observed is be- 
tween free and gratuitous coinage, the former implying the 
right to have bullion converted into coin, the latter being 
coinage without any charge. There may be free coinage, with 
or without gratuitous coinage. 

Another term susceptible of several meanings is seignioragCc 

470 



§ 192] Seigniorage and Debasement 471 

Ordinarily it signifies the charge made by government in re- 
ceiving bullion at its market value, and deducting a certain 
amount before or after coinage. It involves to this extent a 
difference between the bullion and the mint value of the coin, 
and it was this difference which accrued to the mediaeval 
seigneur or local potentate who had the monopoly of coinage. 
But where, as in the United States, owing to a fall in the mar- 
ket price of the bullion, the government purchased a quantity 
of silver for fifty or sixty cents and converted it into a silver 
dollar, the difference, which was officially called ''gains" and 
put into the "silver-profit fund" (or in the case of the sub- 
sidiary silver into the "minor-coinage-profit fund"), was also 
popularly called seigniorage. 

Sometimes a further distinction is made between seigniorage 
(in the first sense) and brassage or mint-charge proper. Bras- 
sage is the sum levied to cover the actual cost of preparing the 
bullion to be coined, while seigniorage would " then be a sur- 
plus charge representing a net gain to the government. This 
distinction is, however, not always observed. In England the 
mediaeval charges were divided between the king and the mint, 
seigniorage proper being abolished in 1666. In the United 
States the law of 1792 provided for gratuitous coinage, but 
imposed a charge of | of i per cent if the coins were de- 
manded at once. The act of 1853 levied a general seignior- 
age of I of I per cent, but when free coinage of silver was 
abolished in 1873 the seigniorage on gold was reduced to i of 
I per cent, and finally disappeared in 1875. The government, 
however, still makes a charge, as fixed by the Director of the 
Mint, to cover the actual cost of preparing the bullion for 
coinage. In France seigniorage is effected by withholding 
some of the coins, instead of the bullion, — in the case of gold, 
seven francs out of the 3100 into which a kilogram of gold is 
coined. 

Seigniorage is thus used in three senses: (a) mint-charge 
proper or brassage, to cover the cost of coinage, and techni- 



472 Money, Practical Problems [§ 192 

cally a fee; (6) an additional charge in the nature of a tax; 
and (c) the gain or profit arising from converting bulHon of a 
low market value into coins with a high face value. Seignior- 
age exists in the United States only in the first and third 
senses. In whatever sense the term is used, however, the im- 
position of a seigniorage always involves a discrepancy be- 
tween the value of the coin and that of the bullion in the coin. 

A discrepancy between the original value of the bullion and 
that of the coin may occur for three further reasons: abra- 
sion, mint accidents and debasement. 

(i) Abrasion denotes the loss of weight by use. There is 
generally a limit of tolerance below which coins forfeit their 
legal-tender quality. In the United States the tolerance is ^ 
of I per cent of the weight of the gold coins within twenty 
years from the date of coinage, or a proportionate loss for a 
smaller period. 

(2) Accidents' in minting involve the so-called remedy or 
deviation. Since the mechanical operations of the mint are 
not mathematically exact, there will always be a slight varia- 
tion in the contents of the new coins. Remedy is the amount 
of variation permitted by law from the exact standard of either 
weight or fineness of the new coins. In England the annual 
test is called the "trial of the pyx." In the United States, 
where the ''pyx" or box is also used, the "trial of the coins" 
is conducted by the Assay Commission. 

(3) Debasement can take place in three ways: (a) by 
diminishing the weight of the metal from which the coin is 
made; {b) by raising the nominal value of a coin and making 
it legal tender at a higher rate than before; and (c) by lower- 
ing the standard or fineness of the metal. 

(a) When the weight of the metal is diminished by private 
individuals, it is called clipping or sweating. But it was 
formerly also practiced by governments. The English pound 
was originally a pound of standard silver, coined into 240 pence. 
Since 1816, a pound of silver has been coined into 792 pence, or 



§ 192] Seigniorage and Debasement 473 

66 shillings. In the same way the silver livre at the time of 
the French Revolution weighed only ts as much as the liher or 
pound of Charlemagne. In some cases, in lieu of diminishing 
the weight of the metal, governments have seen fit to alter the 
material. So the florin, now a silver coin, was originally a gold 
coin; and the Spanish maravedi, which was at first made of 
gold, is now made of copper. 

{b) Debasement by raising the nominal value of the coin 
was common in mediaeval Europe, especially with the gold 
pieces, a new coin with a different name, but with the nominal 
value of the old coin, generally being issued by its side. 
This explains the great variety of English gold coins like 
nobles, angels, rials, unites, laurels, crowns, and guineas. The 
guinea, so-called because coined from gold brought from 
Guinea by the African company, was first struck in 1663 with a 
value fixed in 1717 at 21s., at which figure it still serves to-day 
as a money-of -account. The actual gold coin is the sovereign, 
of 20s., first coined in 1485, which became the standard in 
1816. It is popularly called the pound sterling, both words 
being survivals. For the weight to-day is far less than a pound, 
and the sterling fineness is no longer that employed by the 
" Easterlings " or Scandinavian traders. 

(c) Debasement by lowering the standard of the metal was 
also frequent in mediaeval England and especially in France, 
where the classic example is Philippe le Bel who figures in 
Dante's poem as the typical false moneyer. The purposes of 
debasement have been, first, the discreditable one of securing 
for the king a revenue arising out of the discrepancy between 
nominal and actual values; and secondly, the entirely credit- 
able, but often mistaken, belief that a change in the weight or 
the fineness of the coin would effectually prevent its exporta- 
tion. In the United States, as in most modern countries, 
the few examples of debasement are of this second character. 
This brings up what is known as Gresham's law. 

When different grades of an article can be secured for the 



474 Money^ Practical Problems [§ 192 

same price, individuals use the better one; when different 
grades of money are in existence, they use the poorer one. 
In the first case the individuals act as buyers, in the second 
as sellers. The use of money is not its consumption, but its 
alienation in order to secure things that can be consumed. 
Hence, so long as the poor money has legal tender equally with 
the good, individuals can make profits by melting or exporting 
the latter and paying out the former. This principle is known 
as Gresham's law. 

The name Gresham's law is due to the fact that a Scotch 
writer, McLeod, who was not familiar with the history of eco- 
nomic thought, happened half a century ago to find the idea in 
a report to Elizabeth by Sir Thomas Gresham. In reality, it 
is expressed more fully and forcibly by many of the earlier 
mediaeval writers, not to speak of those of classic antiquity. 

It applies primarily to underweight or debased coin which 
will drive out the full-weight or good coin of the same metal. 
This will happen, however, only under two conditions. First, 
the total amount of money, good and bad, must be in excess 
of the country's needs. In the second place, both the good 
and the poor coins must be actually used as money. A better 
statement of Gresham's law would therefore be that whenever 
a coin is worth appreciably more as bullion than as money it 
will disappear from circulation. 

Gresham's law applies also to paper money as contrasted 
with metaUic money. Here, however, as before, not only must 
the paper be issued to excess before it drives out the coin, 
but public opinion may entirely prevent the circulation of the 
paper money, as was the case with the greenbacks on the Pacific 
slope during the civil war. 

Gresham's law finally applies practically also to coin of one 
metal whose bullion value is less than that of coin of another 
metal, provided that both metals are legal standard money, 
with free coinage. In every case, whenever there is a double 
standard with free coinage of both metals, a discrepancy be- 



§ 193] Choice of the Money Standard 475 

tween the mint and the market ratio makes one of the two 
metals the poorer money, and leads to a gradual disappearance 
of the better money. 

193. The Choice of the Money Standard 

The value of gold and silver is closely related to the cost of 
production. The chief factors that affect the supply, and 
therefore the cost, are the existence or discovery of new stocks, 
and improvements in methods of extraction. 

The ascertainment of new sources of supply is largely a mat- 
ter of chance. To speak only of modern times, there have 
been four such fundamental changes: the opening of the Potosi 
mines in the sixteenth century, the discovery of gold in 
California and Australia around 1850, the development of the 
Comstock silver lode in Nevada in the seventies, and the great 
increase in the output of gold in Africa and the Klondike at the 
close of the century. In the methods of operation also there 
have been great changes from the early "placers," to the modern 
cyanide process. It must not be overlooked, however, that 
the supply itself is affected by the value. If gold, for instance, 
should become relatively scarce, and rise in value, all the com- 
modities, including the wages of hired labor for which the 
miner exchanges his gold, would fall in price, and the resulting 
increase of profits would lead him to use lower-grade ore and 
to increase the output. Per contra, a great increase and cheapen- 
ing of output means a fall in the value of gold or a rise in the 
general price level, and this increased cost or lower profits 
will lead the miner to restrict his operations to the better-grade, 
and hence the less abundant, ore. Thus in the case of the metal 
used as the money standard, a relative abundance or dearth tends 
to correct itself automatically, rendering improbable any con- 
tinuous and permanent increase or decrease in the value of 
money. Within these broad limits, however, there is still ample 
room, as we hg,ve seen, for oscillations in the price level. 
The conditions of supply throughout most of recorded his- 



4/6 Money, Practical Problems [§ 193 

tory have been such as to make gold far more valuable than 
silver. We are told, indeed, that in early times in Arabia silver 
was worth more than gold, and we know that when Japan was 
opened to the Western world gold was worth only four times 
as much as silver. In classic antiquity the value of gold was 
far higher. At one time in Rome the ratio was as high as 17 
to I. The discovery of the gold mines in Noricum about 150 
B. c. changed the ratio to 9 to i, and in the early empire it was 
about II to I. In the early middle ages the ratio hovered 
about 10 to I. The discovery of American altered it to 15 to 
i; and the revolutionary changes in the last quarter of the 
nineteenth century resulted in a ratio of as much as 30 and 40 
to I at various dates between 1900 and 191 5. 

The table facing page 478 will show the changes in production 
since the discovery of America. In the charts opposite pages 
476 and 477 the same facts in somewhat greater detail are 
shown for the more important periods of the nineteenth 
century, not alone for the world in general, but for the 
United States in particular. In the table facing page 480 will 
be found the salient figures illustrating the gradual decline in 
the price of silver from 1873 to 1892, the sudden fall during 
the next two years, and the fluctuations thereafter. The 
reasons for this will be explained later. 

In view of the changing relations of gold and silver the prob- 
lem as to whether both, or only one, and if so which one, should 
be used as the money standard was until very recently a subject 
of serious discussion. The problem has now been solved by the 
adoption, wellnigh throughout the entire world, of the gold 
standard as opposed either to the silver standard or to the 
conjoint use of both metals under the name of bimetallism.^ 

1 The word "bimetallism" was originated by M. Cernuschi in 1869, 
Before that, the term "double standard" was always used. Symmetal- 
lism, as a kind of bimetallism, proposes a single coin composed of the two 
metals. The coins of classical antiquity were sometimes made of elec- 
tron, or a combination of gold and silver. 



PRODUCTION OF SILVER IM THE PRINCIPAL COUNTRIES OF THE 
WORLD FROM 1875 TO 1919, IN TROY OUNCES. 
1875 1880 1885 1 89 1895 1900 1905 1910 1915 1919 

















































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PRODUCTION OF GOLD AND SILVER IN THE UNITED STATES 
FROM 1845 TO 1919^ 



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PRODUCTION OF GOLD IN THE PRINCIPAL COUNTRIES OF THE WORLD 

FROM 1880 TO 1919-. VALUES IN UNITED STATES CURRENCY 

1880 1885 1890 1895 1900 19.05 1910 1915 1919 









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§ 193] Choice of the Money Standard 477 

The history of the evolution of the gold standard may be divided 
into several periods: (i) the alternating standards up to 181 6; 
(2) the embarrassments of bimetallism to 1871-3; (3) the 
struggle for silver to 1900; (4) the final disappearance of the 
silver standard since 1900. 

In the early middle ages the currency was composed almost 
entirely of copper and silver. It was not until the fourteenth 
century that the needs of a growing commerce led to the intro- 
duction of gold coins in the trade centres. As both gold and 
silver coins of definite weight and fineness circulated, each 
country practically had its own legal ratio, which not only 
differed from the market ratio (varying from 9 to i to 12 to i) 
but almost invariably differed from the legal ratio in the other 
countries. As a result the ratio was constantly changed by 
each government through successive recoinages, now of gold, 
now of silver, in order to keep the coins in the country, the 
confusion being heightened by the debasements designed to 
secure a profit for the sovereign. 

No one but a few keen business men, primarily Italians, 
Southern Frenchmen and Jews, who took advantage of these 
discrepancies, comprehended the true reason of the alternating 
outflow or inflow of the precious metals or understood the 
difference between coin and bullion value. What is to-day 
deemed a perfectly legitimate business — that of exporting 
gold or silver — was then considered a heinous offence. But 
neither an adverse public opinion nor drastic legal prohibitions 
were of avail in preventing the disappearance now of gold, now 
of silver. The period, in short, was one of unconscious bimetal- 
lism, with virtually an alternating standard in actual circulation. 

In the sixteenth century came the discovery of the American 
silver mines and the "revolution of prices," which was consum- 
mated by 1660, when the market ratio had risen to 15 to i, a 
fall of about 50 per cent in the value of silver. For the next 
two centuries the relative output of the precious metals did not 
alter materially, and the changes in the market ratio were only 



47^ Money, Practical Problems [{ 



193 



slight. The mint ratios in the various countries had accom- 
modated themselves somewhat more closely to the market 
ratio, but recoinages and oscillations were not infrequent. It 
happened that during the greater part of the eighteenth century 
the mint ratio in France and most of the continental countries 
was in favor of silver, while in England it chanced to be in 
favor of gold. As a consequence the actual currency at the 
close of the century was gold in England, but silver in France. 
This largely accidental situation had important consequences. 

In France the mint ratio of the silver ecus to the gold louis 
was in 1726 14! to i, which resulted practically in a silver 
currency. The ratio was again changed in 1785 to 15^ to i 
and was continued by the law of 1803, which adopted the dec- 
imal system, made the silver franc of five grammes the unit, 
and provided for 20 and 40 franc gold pieces. In England, on 
the other hand, the guinea, which had become since 1663 the 
chief gold coin, was intended to pass at 20 shillings, but was 
actually current at a higher figure. The recoinage of 1696-8 
was designed to furnish a better silver currency, but the value 
of 22 shillings assigned to the guinea caused the silver to dis- 
appear. After constant changes — the government abandon- 
ing for a time the free coinage now of gold, now of silver, now 
raising and now lowering the maximum value of the guinea — 
its value was definitely fixed in 171 7 at 21 shillings, equivalent 
to a ratio of 15.21 to i. As the market ratio was under 15 to 
I, this reduction of the guinea was insufficient, and silver con- 
tinued to disappear, only the poor and worn pieces remaining. 
From 1760 to 1773, however, the market ratio changed from 14! 
to 15I to I, overtaking the mint ratio, so that gold began to bo 
exported, only the poor coins remaining. This led to the gold 
recoinage of 1774, when silver in sums over £25 was declared 
to be legal tender only by weight. Although this provision 
expired in 1783, it was renewed in 1798, when the free coinage 
of silver was also suspended. Thus by the end of the century 
silver had become subsidiary money, and England was really 



PRODUCTION OF GOLD AND SILVER SINCE THE DISCOVERY 
OF AMERICA, ooo OMITTED. 





Gold 


Silver 


Ratio of Silver to 

Gold at the End of 

Each Period 




Total for Period 


Average 
Annual 
Value in 
Dollars 


Total for Period 


Annual 
Average 
Coining 
Value in 
Dollars 


Fine 
Ounces 


Value in 
Dollars 


Fine 
Ounces 


Coining 

Value in 

Dollars 


I 493-1 5 20 


5,221 


$107,931 


$3,855 


42,309 


I54-703 


$1,954 




1521-1540 


5,525 


114,205 


4,759 


69., 598 


89,986 


3,740 




1541-1560 


4,378 


90,492 


5,656 


160,287 


207,240 


12,952 




1561-1580 


4/398 


90,917 


4,546 


192,578 


248,990 


12,450 




1581-1600 


4,745 


98,095 


4,905 


269,353 


348,254 


17,413 




1601-1620 


5,478 


113,248 


5,662 


271,925 


351,579 


17,579 




I 621-1640 


5,337 


110,324 


5,Si6 


253,085 


327,221 


16,361 




1641-1660 


5,639 


116,571 


5,828 


235,531 


304,525 


15,226 




1661-1680 


5,954 


123,084 


6,154 


216,691 


280,166 


14,008 




1681-170C 


6,922 


143,088 


7,154 


219,842 


284,240 


14,212 


14.81 


1701-1720 


8,243 


170,403 


8,520 


228,651 


295,629 


14,781 


15-04 


1721-1740 


12,268 


253,611 


12,681 


277,262 


358,480 


17,924 


14.94 


I 741-1760 


15,824 


327,116 


16,356 


342,812 


443,232 


22,162 


14.14 


1761-1780 


13,313 


275,211 


13,761 


419,712 


542,658 


27,133 


14.72 


1781-1800 


11,439 


236,464 


11,823 


565,236 


730,810 


36,540 


15-68 


1801-1810 


5,716 


118,152 


11,815 


287,469 


371,677 


37,168 


15-77 


1811-1820 


3,680 


76,063 


7,606 


173,857 


224,786 


22,479 


15.62 


1821-1830 


4570 


94,479 


9,448 


148,07c 


191,444 


19,144 


15-82 


1831-184P 


6,523 


134-841 


13,484 


191,759 


247,930 


24,793 


15-62 


1841-1850 


17,605 


363,928 


36,393 


250,903 


324,400 


32,440 


15-70 


1851-18SS 


32.051 


662,566 


132,513 


142,443 


184,169 


36,824 


15-38 


1856-1860 


32,431 


670,415 


134,083 


145,477 


188,092 


37,618 


15-29 


1861-1S65 


29,748 


614,944 


122,989 


177,010 


228,861 


45,772 


15-44 


1866-1870 


31,350 


648,071 


129,614 


215,258 


278,313 


55,663 


15-57 


1871-1875 


27,955 


577,883 


115,577 


316,585 


409,322 


81,864 


16.64 


1876-1880 


27,715 


572,931 


114,586 


393,878 


509,256 


101,851 


18.05 


1881-1885 


23,974 


495,582 


99,116 


460,020 


594,773 


118,955 


19.41 


I 886-1 890 


27,306 


564.474 


112,895 


544,557 


704,074 


130,815 


19.75 


1891-1895 


39,413 


814,786 


162,947 


787,907 


1,108,708 


203,742 


31.60 


I 896- I 900 


. 62,235 


1,286,505 


257,301 


828,467 


1,071,148 


214,230 


33-33 


1901-190S 


77,890 


1,610,310 


322,061 


825,140 


1,066,848 


213,370 


33-87 


I 906-1 9 10 


103,357 


2,166,603 


433,321 


986,585 


1,274,411 


254,882 


38.22 


1911-1915 


111,157 


2,292,558 


458,512 


1,014,791 


1,283,437 


256,687 


36.67 


1916 


21,971 


454,176 


454,176 


161,178 


218,302 


218,302 


30.11 


1917 


20,491 


423,590 


423,590 


163,993 


225,212 


225,212 


23.09 


1918 


18,557 


383,605 


383,605 


198,168 


256,218 


256,218 


21.17 


1919 


17,665 


365,166 


365,166 


174,517 


225,638 


225,638 18.44 



THE FALL IN THE VALUE OF SILVER SINCE 1873 





London Price per 


Equivalent 


Bullion 


Market 


Year 


oz. of Bar Silver, 


Price in Dollars 


Value of 


Ratio of 


Ending 


British Standard 


per oz. 


Silver 


Silver to 


June 30 


(■925) 


of Fine Silver 


Dollar 


Gold 


1873 


59%d 


I 298 


1.004 


1593 


1874 


58^6d. 


1.278 


•989 


16.16 


1875 


56%d. 


1.242 


.961 


16.64 


1876 


53^d. 


1. 164 


.900 


1775 


1877 


54%d. 


1.202 


•930 


17.20 


1878 


52^d. 


I 154 


.892 


17.92 


1879 


5iMd. 


1. 124 


.869 


18.39 


1880 


52Md. 


I -145 


.886 


18.05 


1881 


5i^d. 


1-132 


.876 


18.25 


1882 


5i%d. 


1. 136 


.878 


18.20 


1883 


50%d. 


1 . 109 


.858 


18.64 


1884 


50% 


I. Ill 


.859 


18.61 


1885 


48% 


1.065 


.824 


19.41 


1886 


45^ 


•995 


.769 


20.78 


1887 


44M 


•979 


.758 


21.10 


1888 


42% 


.940 


•727 


22.50 


1889 


42!^6 


•935 


•723 


22.10 


1890 


47M 


1.046 


.809 


19^75 


1891 


45}i 


.988 


.764 


20 . 92 


1892 


39% 


.871 


.674 


23.72 


1893 


35% 


.780 


.604 


26.49 


1894 


28% 


•635 


.491 


32.56 


1895 


29% 


•654 


.506 


31.60 


1896 


30% 


.676 


•523 


30.59 


1897 


27^6 


.604 


.467 


34.20 


1898 


26% 


•590 


•456 


35-03 


1899 


27^16 


.602 


•465 


34^36 


1900 


28% 


.620 


.480 


33-33 


I90I 


27^16 


•596 


.461 


34-68 


1902 


24>l6 


.528 


.408 


39^15 


1903 


24M 


•543 


.420 


38-10 


1904 


26M 


•579 


.448 


35-70 


1905 


27% 


.610 


.472 


33-87 


1906 


30% 


.677 


•523 


30.54 


1907 


30M 


.661 


.512 


31.24 


1908 


24M 


•535 


.414 


38.64 


1909 


^332 


.520 


.402 


39-74 


I910 


24f¥ 


•540 


.418 


38.22 


1911 


24H 


•539 


.417 


38-33 


I912 


28)16 


.615 


•475 


33-62 


I913 


27% 


• 605 


.487 


34-19 


1914 


25% 


•553 


.428 


37-34 


1915 


23^ 


•519 


.401 


39 84 


I916 


31^ 


.687 


.531 


30.11 


1917 


40% 


.875 


.692 


23.09 


I918 


47t? 


.981 


.761 


21.13 


1919 


57t2 


1. 125 


.867 


18.44 



§ 194] Bimetallism 479 

on a gold basis. It was, however, not until i8i6 that the gold 
standard was definitely adopted, silver being* frankly made 
token money by becoming legal tender only up to 40 shillings, 
and by being henceforth coined only on government account. 
A pound of silver ii) fine is since then cut into 66 shillings, but 
issued to the public at 62 shillings; while any one is entitled to 
receive for an ounce of standard gold ii fine £3 17^. lo^d., or in 
cash from the Bank of England (because of delay in coinage) 
£3 175. gd. 

194. Bimetallism 

In the other countries the problem was yet to be solved. 
In the United States, Hamilton, in following the custom of the 
time, had recommended the use of both metals at a ratio of 
15 to I (3715 grains silver and 24! grains gold to the dollar). 
The market ratio, which had been a little less than that in 1790, 
rose to a little more after 1794; but the discrepancy was not 
serious. After 1820, however, the market ratio varied from 
15.6 to 15.8 to I, and gold as the undervalued metal began to 
leave the country. To remedy this state of affairs the eagle 
was in 1834 reduced to 258 grains standard and 232 grains fine, 
making the ratio 16.002 to i; while in 1837, the standard weight 
remaining the same, the fineness was made to conform to that 
of silver (1^0), with a resulting fine content of 232.2 grains or a 
ratio of 15.998 to i. This virtual ratio of 16 to i caused gold 
now to be the overvalued metal, and silver was gradually ex- 
ported. The transition was especially marked in the later 
forties until, in order to keep the small silver in the country, 
the weight of all the subsidiary coins was reduced in 1853. 
Practically, thus, the country had come to be on a gold basis. 
The question, however, now aroused no interest, because the 
actual currency consisted of state bank notes until the civil 
war, and of greenbacks and national bank notes thereafter. 

In France, where up to 1850 the mint ratio of 15I to i was 
slightly below the market ratio, gold gradually disappeared, 
leaving the country to all intents on a silver basis. From 



480 Money, Practical Problems [§ 194 

1850 on, however, the market ratio fell below 15^ to i. Gold, 
began to be im*ported, and France was slowly being drained of 
its silver. The difficulty finally became so serious that France 
formed, in 1865, together with Belgium, Italy, and Switzerland, 
the Latin Union. Greece joined in 1868, and at various later 
dates Spain, Roumania, Servia, and Bulgaria patterned their 
systems on that of the Union. This agreement, while not 
affecting the old silver five-franc pieces, reduced the fineness of 
the subsidiary silver coins, and made them legal tender only to 
fifty francs between individuals and to one hundred francs in 
payments to the government, their coinage by the respective 
states being limited to six francs per capita. The coins cir- 
culated interchangeably and each state bound itself to redeem 
its own coins in gold or five-franc pieces for a period of two 
years beyond the termination of the Union. 

In the other countries the unrest grew. Portugal followed 
England in adopting the gold standard in 1854, and the first 
international monetary congress, held in Paris in 1867, pro- 
nounced itself in favor of the same scheme. Germany also 
took advantage of the victory over France to adopt the gold 
standard in 1 871-1873. The new silver mark was to be legal 
tender only to 20 marks ($5), although the old Vereinsthaler 
still remained legal tender. Free coinage of silver, however, 
was discontinued, and much of the old silver was thrown on 
the market to be sold. The Scandinavian monetary union also 
adopted the gold standard in 1873. These measures, coupled 
with the discovery of the Comstock lode, combined to depress 
the price of silver and to bring the difficulties of bimetallism to 
a head in the other countries. 

The Latin Union was now flooded with silver under the free 
coinage provision and was threatened with a loss of its gold. 
Belgium had already provisionally suspended free coinage in 
1873, and France followed in 1876. Finally, in 1878 the Latin 
Union, definitely abrogated the free coinage of the five-franc 
pieces. Thus was introduced the "limping" or "halting" 



§ 194] Bimetallism 481 

standard, so called because silver now lost one of the two sup- 
ports — legal tender and free coinage — which are essential to 
real bimetallism. 

Free coinage was technically permitted, but it was provided 
that any state adopting this system could not circulate its 
silver coins in the other countries, and would be obligated to 
redeem in gold the five-franc pieces of the other countries. 
This meant, of course, that free coinage was practically im- 
possible. Moreover, if the union should be terminated at 
any time, each state was held to redeem its five-franc pieces 
circulating in any other country. Thus was added to the sus- 
pension of free coinage the principle of redemption of the silver 
currency in gold. Owing to the fact that France holds large 
quantities of silver coined by the other members of the Union, 
some of which would find great difficulty in redeeming their 
quota, the Union bids fair to continue for a long period. To 
all intents, however, the Latin Union has been on a gold basis 
since 1878 because although the silver five-franc coins are still 
full legal tender, there is no free coinage, and the value of what 
is virtually a token money is kept at parity with that of the 
gold-standard money by a limitation of the quantity coined 
and by its acceptance at the treasury for public dues. 

In the United States the agitation did not begin until the 
fall in the price of silver had become marked in 1875. The act 
of 1873 omitted the silver dollar from the list of American coins, 
largely because of the fact that for years no such dollars had 
been coined. The few outstanding dollars, however, retained 
their full legal tender quality until 1874, when the revised 
statutes, reenacting the subsidiary silver law of 1853, provided 
that ''the silver coins" of the United States should be legal 
tender only to five dollars. The American silver producers 
now thought that the fall in the price of silver could be arrested 
by an artificial increase of the demand, and the Bland-Allison 
act of 1878 directed the secretary of the treasury to purchase 
monthly at the market price not less than two, nor more than 
31 



482 Money, Practical Problems [§ 194 

four, million dollars' worth of silver bullion, and to coin it into 
the standard silver dollars, which were again made legal tender. 
For each dollar, so coined and kept in the treasury, silver cer- 
tificates were to be issued. 

Neither this act nor the suspension in 1878 of the sales of 
the old Thaler by Germany served to arrest the fall in the price 
of silver. The gold standard had been virtually adopted by 
the Netherlands in 1875-6, and in 1885 it was introduced into 
Egypt. The Western farmers now began to ascribe the low 
price of wheat to the competition in the silver-standard coun- 
tries, and demanded the remonetization of silver in the belief 
that this would increase prices. The union of the farmers with 
the mine owners led to a renewed agitation for free silver, the 
result being a compromise measure known as the Sherman 
law of 1890. This act abrogated the law of 1878 (under which 
a total of 370 million silver dollars had been coined), and sub- 
stituted the monthly purchase by the government of four and 
a half million ounces of silver, at the market price, to be paid 
for in new Treasury Notes, which were to be redeemable in gold 
or silver coin. After July i, 1891, the coinage of the silver 
dollars was to cease, except so far as it might be necessary to 
secure the outstanding treasury notes. 

In the course of a few years the gradual accumulation of 
silver drove out the gold and endangered the stability of the 
gold reserve. When the government of India closed its 
mints to the free coinage of silver, a crisis ensued, and led in 
November, 1893, to the hasty repeal of the Sherman law, under 
which 168,674,682.53 fine ounces had been purchased at a cost 
of $155,931,002.25. With this came to an end the govern- 
ment's effort to create an artificial market for silver as a step- 
ping-stone to bimetallism. As a result of the Indian and Ameri- 
can measures the price of silver now dropped enormously, the 
ratio jumping from 19! to i in 1890 to 32^ to i in 1894. 

From now to the end of the century came the acute struggle 
in the United States and the progressive adoption of the gold 



§ 195] Adoption of the Gold Standard 483 

standard elsewhere. In 1892 it had been introduced into 
Austria, followed by Chile in 1895, Costa Rica in 1896, and 
Russia and Japan in 1897. In the same year Peru suspended 
the free coinage of silver, in 1898 Ecuador limited its legal 
tender, and in 1899 India adopted the gold standard. In the 
United States a fierce presidential campaign was waged in 
1896 for the complete remonetization of silver at the old ratio 
of 16 to I. 

The defeat of the silver agitation was followed by the act of 
1900, which defined as the standard the gold dollar. It was 
provided that all forms of money issued or coined by the govern- 
ment should be maintained at a parity with the standard, and 
that the United States notes (greenbacks) and treasury notes 
should be redeemed in gold coin and not reissued except in 
exchange for gold; and for such redemption purposes a reserve 
fund of 150 millions of gold was created. Whenever the fund 
should fall below this figure the issue of gold certificates was to 
cease,^ and the secretary of the treasury was empowered to sell 
bonds to replenish it. Finally, the treasury notes of 1890 were 
to be cancelled and replaced by silver certificates as fast as the 
silver bullion bought under the Sherman act might be coined. 
Thus the United States placed itself in line with the other gold- 
standard nations. 

195. The Adoption of the Gold Standard 

The gold standard had now been adopted in the most im- 
portant countries. But there remained some of the American 
republics, the colonial possessions of the United States and a 
large part of Asia, still on the silver standard. In almost all 
of these countries the currency was composed exclusively of 
silver, and the situation had become wellnigh intolerable to 
merchants and others having foreign dealings, because of the 
so-called "dislocation of thfe exchanges," whereby purchasers 

^ In igo6 the limit was reduced so that the issue of gold certificates is 
to cease only when the fund falls below fifty millions. 



484 Money, Practical Problems [§ 195 

of bills of exchange (see § 198) were exposed to the continual 
fluctuations in the silver which they paid or received for the 
bills. In the more important states, however, it would have 
been entirely too costly either to melt down the old silver 
currency or to purchase enough gold to serve as a circulating 
medium. It was necessary to devise some method which 
would furnish the chief advantages of the gold standard and 
yet retain the circulation of silver. The first country to under- 
take this task was India. 

India was in a peculiarly embarrassing condition because the 
fall in the price of silver caused the government a constantly 
increasing loss in the large remittances which it was obliged to 
make in gold to the mother country for interest on the debt 
and for its contribution to imperial expenditures. The Indian 
standard was the silver rupee, originally worth about two 
shillings, but which had fallen by 1893 to about 14 J. The 
ordinary mode of making remittances to England was by the 
India Government Council in London selling to merchants who 
had bought goods in India bills of exchange, known as Council 
Bills, and payable in rupees in India by the government. The 
Indian government now in 1893 suspended the free coinage of 
silver, and declared that it would sell bills of exchange in Lon- 
don, or mint rupees in India in exchange for gold, at the rate 
of 15 rupees to a pound, or i6d. for a rupee — equivalent to a 
ratio of about 22 to i. Although gold was not legal tender, 
the government agreed to accept it in payment of public dues. 
The object of these measures was to limit the coinage, and 
hence the quantity, of the rupees in the hope that their value 
would, in the face of an increasing demand, gradually rise to 
the desired par. After two or three years the stationary cur- 
rency in the face of growing population and business meant a 
relative contraction, and the gold price of the rupee gradually 
rose until, by 1898, it reached, and even slightly exceeded, the 
desired par of i6d. As a consequence, gold now began to flow 
into India, because there was a profit in tendering it to the 



§ igs] Adoption of the Gold Standard 485 

government for silver. This permitted the government to ac- 
cumulate a reserve of gold, and in 1899 India decided to adopt 
the gold standard, declaring gold coins to be legal tender at the 
rate of 15 rupees for a sovereign. In 1920, as a result of the price 
changes, this was altered to 10 rupees. In India, therefore, the 
rupees still have unlimited legal tender, but are virtually a token 
currency, because there is no free coinage. Gold, but not silver, 
can be tendered at the reserve; and while the Indian government 
will take gold in exchange for rupees, it is under no obligation 
to pay out gold. As long, however, as the free coinage of silver 
is suspended, the government is able to maintain the value of the 
rupees by coining only as many as are necessary, procuring the 
silver for this purpose by selling gold. Thus the gold standard 
is automatically preserved through the paper currency reserve, 
although the currency is composed of token silver and paper notes. 
The same principle, although in a slightly different form, was 
adopted in the Philippines in 1903, under what has become 
known as the gold-exchange standard. The unit of value was 
made the gold peso, but the actual coins were the new silver 
pesos. The pesos, in lieu of which silver certificates may be 
emitted, are legal tender, but can be coined only on govern- 
ment account. In order to keep the silver coins at a parity with 
gold, and in order to redeem the silver certificates, the govern- 
ment maintains, in both the Philippines and New York, a cur- 
rency reserve fund against which bills of exchange are sold 
at a fixed rate whenever there is a demand for gold for making 
payments abroad. If there is a danger of a scarcity of money, 
the government can put more pesos into circulation; and if 
there is an imminent excess of silver, with a resultant rise of 
prices which would normally mean an export of coin, the 
government stands ready to sell drafts upon its gold fund 
abroad at a fixed price. The local silver coins paid for such 
drafts are then withdrawn from circulation, thus diminishing 
the redundancy of the currency and causing prices to fall. If 
prices threaten to fall too far, and there is a renewed demand 



486 Money, Practical Problems [§ 195 

for silver money, gold may be deposited in the local reserves, 
setting free a corresponding amount of silver currency. In this 
way a stability of value is attained. 

The ratio selected was 32 to i. This v/as supposed to be 
a safe margin; but silver unexpectedly rose in price, and by 
1906 was worth si^d. an ounce, equivalent to less than 30 to 
I. In order, therefore, to prevent the disappearance of the 
silver pesos, the act of 1906 provided for a recoinage, reducing 
the fineness of the peso. The act also authorized the deposit 
in the Philippine treasury of United States gold coin for cer- 
tificates hereafter to be coined, up to 60 per cent of the total 
issues. Thus not only is the uncoined gold peso the standard, 
but the government paper currency becomes in major part a 
currency of gold certificates. 

In 1904 Panama adopted the same system, the monetary 
gold unit, not coined, being the balboa, equivalent to an Ameri- 
can dollar. The silver peso is full legal tender, but as there is 
no free coinage, it is really a token coin, and ofhcially spoken 
of as fractional currency. Its parity of value with gold is 
insured by a deposit in the United States of a gold reserve equal 
to 15 per cent of the issue, on which bills of exchange may be 
drawn in case of need. 

Mexico also adopted the gold-exchange standard in 1905, 
but reached in 1907 the full gold standard, with a large actual 
circulation of gold. 

Finally, the Straits Settlements decided in 1906 to adopt 
the method pursued in India from 1893 to 1899, rather than 
the gold-exchange standard. It fixed the sterling value of the 
new silver dollar, established in 1903 and not subject to free 
coinage, at 2s. /^d. by offering to give dollars in new silver notes 
for sovereigns at that rate. As the government has not yet 
(1914) offered to give sovereigns in exchange for dollars, only 
an upper limit to the fluctuation of the silver dollar has thus 
far been fixed. But a gold reserve was established in 1908 
out of the profits of the silver coinage, and the weight of the 



§ 195] Adoption of the Gold Standard 487 

dollar was reduced in 1907. The Straits Settlements ought 
accordingly soon to reach the position attained by India in 
1899, and be ready for a gold standard. 

Thus, of the countries on the silver standard there remained 
in 1 9 14 only Bolivia, China, a part of Central America, the 
minor British colonies in the Orient, and Indo-China; and it is 
to be expected that despite peculiar difficulties incident to some 
of these nations, they will also before long follow the example 
of India, the Philippines or Mexico. 

We see therefore that the gold standard has been wellnigh 
universally adopted in one of several ways: 

(i) The gold standard proper, with a gold coinage and where 
there is neither free coinage nor full legal tender for silver, as 
in England, Germany and the United States. 

(2) The limping standard, with a gold coinage, where the 
silver still possesses unlimited legal tender but is kept at a 
parity with gold by the abrogation of free coinage and by the 
offer of redemption in gold. This is the case in the Latin Union, 
in India and in Mexico. 

(3) The exchange standard, where the actual currency is 
full legal-tender silver kept at a parity with gold, not only by 
the suspension of free coinage but by the adoption of either 
(a) the gold-exchange method, w^here gold, although not coined, 
becomes the standard and where the silver is redeemable in 
gold exchange; or what may be called (b) the fixity-of-exchange 
method, where gold is not yet the standard, but where the 
silver coin is pulled up to, or kept at, a fixed value by the re- 
striction of the coinage coupled with the offer to give silver 
coins in exchange for gold at a fixed price. Of these two 
methods the former is preferable, because it does not neces- 
sarily involve any alteration in the money unit or the domes- 
tic price level. The latter is open to the objection that the 
sudden raising of the silver unit, or appreciation of money, 
involves a decline of prices with all the perturbations and 
disorders incident thereto. Furthermore, under the former 



488 Money, Practical Problems [§ 196 

method, gold or gold-exchange is paid out for silver, as well as 
silver for gold, thus setting an inferior as well as a superior 
limit to the fluctuations of the par of exchange. 

Thus the evolution of the money standard has completed 
its natural course. At the outset of civilization a metal of 
slight value suffices; with the growth of trade a more precious 
metal is necessary; and finally with the highest development 
of industry the most valuable metal becomes the standard. 

While, however, gold is now the standard, the money in 
actual circulation in modern times is in almost all progressive 
countries coming to be in more or less substantial proportions 
money made of paper, rather than of metal. To this we must 
now turn our attention. 

196. Paper Money 

Paper money as opposed to metallic money may, as we have 
learned (p. 451), be classified into fiduciary or credit money, 
representative money and fiat money. 

(i) In one sense all money, paper and metallic, is credit 
money, in that the value of all money rests at bottom on the 
belief that other people will receive it in exchange. In the 
narrower sense, however, credit money means money issued 
by credit institutions. Credit money, then, consists chiefly of 
bank notes, which are usually convertible into coin and are 
not legal tender. When, however, they are both inconvert- 
ible and legal tender, they become in many respects practically 
indistinguishable from fiat money. Credit money will receive 
a fuller discussion in chapter xxxi. 

(2) Representative money consists of paper which certifies 
that an equivalent amount of coin or bullion is deposited in the 
government treasury. It is thus in the nature of a warehouse 
receipt, and is virtually equal to coin, the chief advantage con- 
sisting in the fact that it affords the public a more convenient 
medium of exchange. The larger part of the paper circulation 
of the United States is composed of these coin certificates. 



§ 196] Paper Money 489 

The gold certificates were originally authorized in 1863, in 
denominations of $20, on deposit of gold coin or bullion. Their 
i33ue was suspended in 1878 (in order to facilitate the resump- 
tion of specie payments), authorized anew in 1882, again sus- 
pended in 1893 (when the gold reserve was being depleted by 
the silver agitation), and reauthorized in 1900. It was then 
provided that their issue be suspended when the gold reserve 
kept in the treasury for the redemption of the United States 
notes and treasury notes falls below 100 millions, a danger 
limit which was reduced in 1906 to 50 millions. The gold 
certificates are not legal tender, but are receivable for customs, 
taxes, and public dues, and may be counted as part of the law- 
ful money reserve of the national banks. Since 1907 they may 
be issued also in denominations of $10. In April, 192 1, there 
were 419 millions in circulation. Partly like these gold cer- 
tificates are the German Reichskasse^ischeine, of which there were 
outstanding before the Great War 120 million marks, covered by 
an equal amount of gold coin in the fortress of Spandau. 

The silver certificates were issued in 1878, upon silver dollars 
deposited in the treasury or coined under that act. The de- 
nominations were limited to ten dollars and upward, but were 
changed in 1886 to one, two, and five dollars. Like the gold 
certificates, they are not legal tender, but are receivable for 
customs, taxes, and pubhc dues, and may be counted as part 
of the lawful reserve of the national banks. In April, 1921, 
there were in circulation 164 millions. 

While representative money usually represents coin or bul- 
lion, we occasionally find certificates representing the standard, 
legal-tender, fiat paper money. In that case the certificates 
are obviously only as good as the fiat money which they repre- 
sent. Of this character were the currency certificates issued 
between 1872 and 1900 to national banks in large denomina- 
tions on deposit of United States notes, and utilized chiefly 
in settlement of clearing-house balances. 

Analogous to, although not identical with, the money hitherto 



49 o Money, Practical Problems [§ 196 

described, is the paper issued by government in relatively small 
amounts and protected, if not by an equivalent quantity of 
coin, at least by ample reserves of bullion. Of such character 
are the exchequer notes and treasury certificates occasionally 
found in European countries, and the treasury notes issued at 
various periods in the United States. Herein may also be 
included the treasury notes of 1890, issued by the United States 
in that year, in denominations of from $1 to $1000, in exchange 
for the silver bullion purchased under the Sherman law. These 
notes were redeemable in coin (gold or silver), and were legal 
tender for customs duties and for all private debts except when 
otherwise stipulated, and could also be counted as a part of the 
lawful reserves of banks. When the Sherman act was repealed 
in 1893 their further issue ($155,931,000 being outstanding) 
was stopped, and their redemption has since then continued, 
until in April, 192 1, only $1,591,000 remained. 

(3) Fiat money, i. e., money issued on the simple fiat or 
declaration of government, constitutes the typical case of 
paper money. Here the government assigns an arbitrary value 
to a piece of paper and invests it with legal-tender qualities. 
It has sometimes been questioned whether paper of this kind 
is really money, the objection being made that in order to 
serve as a measure of value the commodity used as money must 
possess value in and of itself. It is now, however, almost 
universally conceded by careful thinkers that money cannot 
be confined to that made of metal, and that paper money is 
money in precisely the same sense as metallic money. It may 
not always be good money, and it is undoubtedly subject to 
serious dangers; but as long as it serves as a medium of ex- 
change and the standard in which accounts are kept, it is none 
the less money. Although it may have no value as paper, it 
may possess a value as money — a value arising from the de- 
mand for it for monetary purposes. In issuing coins, goverri- 
ments, as we know, often charge a seigniorage, making a 
discrepancy between the value of the coin and that of the bullion 



§196] Paper Money 491 

in the coin. As Ricardo first showed, paper money is a case 
where the seigniorage amounts to 100 per cent. Even debased 
coin, i. e., coin whose legal value far surpasses its bullion value, 
will, as we pointed out in the discussion of Gresham's law, 
retain its value if used as standard money, on condition that 
it is received by the public and that its issue is so limited that 
the total supply of money does not exceed the monetary demand. 
Fiat money is in this respect comparable to debased coin, and 
may equally serve as the standard money. 

Fiat money is almost always, but not necessarily, paper 
money. The silver rupee in India, for instance, was fiat money 
from 1893 to 1899, because the government assigned to it a 
higher value than it really possessed and was able, by limiting 
its supply in the face of a growing demand, gradually to pull 
it up to the desired level. So the new dollar coined in 1906 
by the Straits Settlements is fiat money, i. e., standard money 
to which an artificial value is given by restricting the quantity. 
When government gives an artificial value to subsidiary money, 
like the American fractional currency, we usually speak of 
token, rather than of fiat, money. 

Fiat paper money (or "soft" money as opposed to "hard" 
or metallic money) may thus perform all the important mone- 
tary functions within a country. Since, however, international 
debts can be paid only in gold or its equivalent, the paper 
money of any one country is a good international money only 
so far as it preserves its value in reference to gold. The two 
causes of the depreciation of irredeemable fiat money — i. e., 
paper which the government refuses to redeem in coin — are 
over-issue and distrust. 

(a) The over-issue of fiat money means that the supply, 
susceptible of easy multiplication by the printing press, may 
exceed the ordinary monetary demand of the community. In 
this case we have a simple illustration of the quantity theory 
of money, its value, after a certain amount has been issued, 
falling at a rate somewhat proportionate to the increase in the 



492 Money, Practical Problems [§ 196 

supply. The reader need not be reminded, however, that any- 
concurrent changes in the demand for money, as explained in 
§187, may arrest and modify, without however seriously affect- 
ing, the influence of an over-issue. 

{b) Distrust of the government's ability ultimately to redeem 
th* fiat money is ordinarily the consequence of the mere fact 
of over-issue. It may, however, exert an independent influ- 
ence, even when the issue is not redundant. Thus, during the 
Civil War the depreciation of the greenbacks, or the premium 
on gold, frequently varied with the military outlook, without 
any synchronous changes in the supply of money or in the 
other factors affecting the demand. The mere affixing to the 
greenbacks of a promise to pay is as unavailing as it is superflu- 
ous. For fiat money retains its value only because of the 
public belief that it is as good as coin and that the government 
proposes to keep it so. If it depreciates, the public gauges 
the government's ability to redeem it by the actual and pro- 
spective economic and fiscal conditions, and not by any printed 
asseveration of intentions. An explicit promise, which is not 
observed, is less good than an implicit promise which is sup- 
ported by the facts. What gives fiat money its value are 
facts, not promises. 

Although fiat money was first used in China in the twelfth 
century, the chief examples of modern times date from the 
eighteenth century, and are found in America and France. 
Almost all the American colonies issued paper money with 
various resultant degrees of depreciation, in some cases as 
much as eleven to one, until stopped by the British laws of 
175 1 and 1763. In the Revolution, fiat money was again 
utilized by the separate commonwealths as well as by the con- 
federation, the early continental issues depreciating to such an 
extent that within a few years they were redeemed at the ab- 
surd figure of forty for one. In France the fiat money under 
the Mississippi scheme of John Law in 1716-1721 began as a 
convertible bank-note issue, which was soon made inconvertible 



§ 196] Paper Money 493 

and legal tender, thus becoming indistinguishable from irre- 
deemable fiat money, and through its collapse bringing France 
to the verge of ruin. The costly experiment was not renewed 
until the close of the century, when an endeavor was made to 
finance the Revolution by the issue of ''assignats" based on 
land security. The advantage of such a system of "land- 
notes" is, however, illusory; in pre-revolutionary Pennsylvania, 
where they were also tried, the depreciation was indeed only 
moderate, because the issue was restricted; in some of the 
other colonies, as well as in France, where this precaution was 
not observed, the experiment ended in dire failure. 

Since the beginning of the nineteenth century, while numer- 
ous examples of depreciated fiat money are found on the Eu- 
ropean continent and in South America, the two chief cases of 
interest to us are the Bank Restriction in England and the 
issue of the American greenbacks. In England, the govern- 
ment, owing to the contest with France, and solicitous of its 
specie reserve in the Bank of England, procured the enactment 
of a law in 1797 "restraining" the bank from making specie 
payments. The convertible bank notes thus became legal- 
tender fiat money, and depreciated almost fifteen per cent 
before the resumption of specie payments in 18 19. 

In the United States, on the outbreak of the Civil War, a 
law of 1 86 1 authorized the issue of fifty (subsequently increased 
to sixty) millions of demand notes, i. e., notes payable on de- 
mand. In 1862 the issue was increased to 150 millions, and 
the notes were made legal tender for the payment of all debts, 
public and private, except customs duties and interest on the 
public debt. The lowest denomination had originally been $5, 
but smaller issues were now permitted. Ofiicially they were 
called United States notes; popularly they were known as legal 
tenders or, from their color, greenbacks. Later, in 1862, the 
issue was increased to 300, and in 1863 to 450 millions. The 
result of this, coupled with the fortunes of the war, was a pro- 
gressive depreciation, reaching its climax in July, 1864, when 



494 Money, Practical Problems [§196 

a paper dollar was worth only 35 cents in gold. In 1866 the 
retirement of the notes was initiated, at the rate of ten millions 
a month for six months, and four millions a month thereafter. 
By the close of 1867 the amount outstanding had been reduced 
to 356 millions when, owing to the fear of a further contrac- 
tion in prices and the spread of the "soft-money idea" in the 
Middle West, the reduction was stopped in 1868, leading to a 
further period of uncertainty and confusion. During the panic 
of 1873 the issues were augmented to 382 millions, but after the 
veto by President Grant of the "Inflation Bill" of 1874 to in- 
crease the greenbacks, the Resumption Act of 1875 provided 
for a retirement at the rate of 80 per cent of the national bank 
notes to be issued in their stead. On May 31, 1878, their re- 
tirement was stopped at the accidental figure of $346,681,016, 
and the amount outstanding has remained at that point to the 
present day. In 1879 the resumption of specie payments was 
finally accomplished, and the greenbacks have ever since been 
forming a constantly declining proportion of the American paper 
circulation, being protected and kept at par by the exist- 
ence of the gold reserve. In 1900 the smallest denomination 
permitted was ten dollars, but in 1907 issues of one, two, and 
five doUars were authorized. 

When bank money loses its convertibility, it partakes, especially 
when invested with the legal tender quality, of the nature of gov- 
ernment or fiat money. In Europe, as the result of the Great 
War, much of the so-called bank money has in fact, if not always 
in name, gone through this transition. This is true of the cur- 
rency notes, issued by the Treasury in England against com- 
mercial paper deposited by the banks, of the German banknotes, 
and Darlehenskassenscheine or loan bank notes, and of the 
French bank notes. At the close of the war in September, 1918, 
there were outstanding in Great Britain 1,304 million dollars of 
currency notes, with a gold cover of only 138 millions; in Ger- 
many 5,285 million dollars of imperial bank notes with a gold 
cover of 538 millions; and in France 5,838 million dollars of bank 



§196] Paper Money 495 

notes with a gold cover of 664 millions. When, as in all these 
cases, the reserve amounts to only about 10%, we cannot speak 
of convertible bank currency. An inconvertible bank currency 
is scarcely in any respect superior to an irredeemable government 
currency. 

Fiat money, then, is satisfactory only if the amount is care- 
fully restricted. Because of the inherent danger of, and tempta- 
tion to, inflation, fiat money is inferior to credit money, which 
under a good system possesses the advantage not only of an 
elasticity, but of an automatically regulated supply. 

The three kinds of paper money discussed in this section 
may also be classified into the two categories of bank money 
and government money. In Europe almost the entire paper 
currency was until the Great War composed of the former; 
in the United States, as a result partly of accident, partly of 
the silver movement, partly of a certain ungrounded distrust 
of the national banks, and partly of defective legislation, about 
three-fourths of the paper circulation consisted until 19 13 of 
government money. Since the introduction of the Federal 
Reserve system, the proportions tend to be reversed. On the 
chart opposite page 532 will be found the details of the bank and 
total monetary circulation since 1878. The great advantage of 
a carefully guarded government currency is absolute security. 
The convertibility of all the United States issues, for instance, 
is now assured by law, the act of 1900 imposing on the Secretary 
of the Treasury t*he obligation to maintain all other forms of 
government money at a parity with gold, and assigning for such 
redemption purposes, particularly of the greenbacks, a special 
reserve fund of 150 million dollars of gold, to be replenished in 
case of need by the sale of bonds. On the other hand, the dis- 
advantages of government paper consists not only in the temp- 
tation to inflation, but also in a certain rigidity or incapacity 
to adjust itself to the varying needs of the business community. 
Bank money, on the other hand, as we shall see, may be made to 
possess all the safety of government money without incurring 
any of its hazards. 



CHAPTER XXX 

CREDIT AND BANKING 
197. References 

J. S. Mill, Principles, bk. iii, chs. xi-xiii; W. S. Jevons, Investigations 
in Currency and Finance (1884) ; chs. i, v-viii; H. D. McLeod, The Theory 
and Practice of Banking (15th ed., 1892); C. F. Dunbar, Chapters on the 
History and Theory of Banking (2d ed., 1901), chs. ii and iv; J. T. 
Holdsworth, Money and Banking (2d ed., 1918); J. F. Johnson, 
Money and Currency (1905), ch. iii; Horace White, Money and Banking 
(4th ed., 1912), bk. iii, chs. i-iii; W. Bagehot, Lombard Street (1873); 
W. A. Scott, Money and Banking (1903), chs. vii, viii-xi; Publications of 
the National Monetary Commission (23 vols , 1901-1912); E. E. Agger, 
Organized Banking (1918); H. H. Withers, The Meaning of Money (15 
imp., 1917); and The War and Lombard Street (3d ed., 1917); J. P. 
Norton, Statistical Studies in the New York Money Market (igo2); R. H. 
Inglis Palgrave, Bank Rate and the Money Market in England, France, 
Germany, Holland, and Belgium, 1844-igoo (1903); G. L. Taylor, The 
Credit System (19 14). 

198. The Nature and Forms of Credit 

Credit is an exchange or transaction which consists in the 
temporary transfer of the usance of wealth. The wealth may 
be composed of concrete goods, a fund of capital, or a mere right 
or privilege. In modern times most of the wealth so trans- 
ferred has come to consist of money, so that credit nowadays 
primarily implies a temporary transfer of money or of rights to 
money. 

We must be careful not to confuse the legal with the eco- 
nomic conception. Legally, if we part with the ownership of 
anything, it is a sale; if we part with the possession while re- 
taining the ownership, it is a loan. Economically, the essence 
of credit is the temporary usance of wealth. A sale on credit 
is, from the economic point of view, no sale at all. Legally, 

496 



§ igS] Nature and Forms of Credit 497 

the ownership is transferred and the payment is deferred; 
economically, it is a grant to the purchaser to utilize the com- 
modity subject to the prior economic right of the seller to have 
a certain sum of money returned to him. The economic aliena- 
tion does not become complete until the payment of the money 
is effected, that is, until the credit expires. 

From this fundamental fact flow three consequences: (i) 
Since the transfer is temporary, it must terminate at a future 
date. The loan must be repaid, and if in the meantime the 
subject of the loan has disappeared, its economic equivalent 
must be returned. (2) Whenever commodities are loaned and 
payment is deferred until the expiration of a certain period, 
there is, strictly speaking, a case of credit. In the overwhelm- 
ing mass of modern business transactions, however, what is 
loaned is not a commodity, but a sum of money. Credit thus 
virtually becomes a contract for the future delivery of money, 
or a "short sale" of money, and credit is thus best discussed in 
connection with money. (3) The lender must trust the ability 
of the borrower to meet his obligation at the stipulated date. 
All credit rests on confidence, — a confidence which runs through 
the whole gamut of risk. 

The essence of credit, then, is the right of enjoying some- 
thing, in most cases money, the ultimate economic title to 
which belongs to another. According to the use made of the 
enjoyment we distinguish between production and consumption 
credit. If we borrow money from a friend or pawn a watch in 
order to buy a meal, the credit is for purposes of consumption. 
If we borrow funds to increase our business, the credit is for 
purposes of production. With the advent of modern economic 
conditions, credit has become to an overwhelming degree pro- 
ductive credit. This explains its advantages and its dangers 
alike. If the goods, capital, or privileges are so utilized by the 
borrower as to yield a surplus over and above that part of the 
produce requisite to pay for the use of the loan, credit performs 
the function of capital and may be deemed equivalent to an 
32 



498 Credit and Banking [§ 198 

increase of capital. In that sense credit might be called aux- 
iliary capital. By this is not meant that credit is actually 
capital, for if the capital is in the hands of the borrower, it is 
withdrawn from those of the lender. In the hands of the bor- 
rower, however, the capital does more good than in those of 
the lender, for otherwise it would not be transferred. To the 
extent that credit puts capital where it is more productive 
than it would otherwise be, it is equivalent to an increase, or 
at all events to an increased usefulness, of capital. 

On the other hand, if the funds secured through credit are 
unwisely utilized or dissipated, they diminish the productive 
forces of the community, because the debtor not only wastes 
his own efforts, but is unable to replace the borrowed capital. 
Owing to the facility with which modern credit can be obtained, 
it is peculiarly susceptible of abuse. If a man has to create or 
to accumulate capital, he will be moderately careful in its 
employment; if he secures it on credit, he is more apt to take 
chances. He is relieved from immediate cares, and is likely 
to paint the future in roseate hues. Inasmuch as credit rests 
on confidence, it is human nature, in dealing with the property 
of another, to have a misplaced confidence in one's self. 

Credit, like capital, is either commercial, industrial, agricul- 
tural, or financial. In the broader sense all credit is financial, 
because money or money's worth must be repaid. But the 
classification is none the less useful from the point of view of 
the credit instrument. 

Commercial credit takes the form, apart from the ordinary 
book accounts and due bills, of promissory notes and drafts or 
bills of exchange. A promissory note is a written promise to 
pay a certain sum to the person designated as payee, either 
on demand or at the expiration of a definite period. It can 
be indorsed by the payee, and is then further negotiable, the 
indorser making himself responsible (unless he adds the words 

without recourse") in case the note is not honored at maturity 
by the original maker. If there is one indorsement on the 



§ 198] Nature and Forms of Credit 499 

note, it is called double-name paper, because both maker and 
indorser are responsible. If there are two indorsers, it is called 
three-name paper. 

A draft or bill of exchange is a written order addressed by the 
seller of merchandise to the purchaser, requesting the payment 
of a definite sum. If payable on demand, it is called a sight 
bill; if at the expiration of a fixed period, a time-bill, which is 
itself either a short or a long bill, according to the period for 
which it runs. The seller of the goods is said to draw upon 
the purchaser, and is hence called the drawer of the bill. A 
time-bill is at once presented to the "drawee,*' who by writing 
his name below the word '^ accepted" is said to "accept" it, 
thus virtually converting the bill into his own promissory note. 
By negotiating the bill, the seller of the goods can hence secure 
immediate payment, less the commission or discount. If both 
drawer and drawee live in the same country, the bill of exchange 
is termed a domestic bill or in America a draft; if they live in 
different countries, it is a foreign bill. Oftentimes it is sought to 
add to the personal security of the note or bill. In the case of 
promissory notes, the collateral securities pledged are generally 
stocks, bonds, and mortgages, and the note is then called a 
collateral note. Drafts or bills, on the other hand, are fre- 
quently accompanied by certificates testifying to the possession 
of commodities, like bills of lading, dock warrants, and ware- 
house and elevator receipts. In the case of a bill of lading it 
is customary to attach the invoice and the insurance policy. 
Such bills are usually called "documented" bills. Of this char- 
acter also are the grain or cotton notes and the cattle paper in 
the South and West. In the case of a future, instead of a past, 
transaction, the notes and bills are called accommodation 
paper. An intending purchaser "accommodates" the future 
seller by giving his note at the beginning, instead of at the 
conclusion, of the transaction. Accommodation paper, however, 
is often issued without any intention of a real transfer of goods, 
and thus affords ample opportunity for speculation. 



500 Credit and Banking [§ igg 

As opposed to these promissory notes, drafts, and bills, which 
constitute the usual "commercial paper," industrial credit in- 
struments comprise documents or securities connected with 
corporate industry like certificates of stock, and bonds which 
represent contingent rather than actual ownership. The prin- 
cipal forms of these have been described in § 141. Agricul- 
tural credit instruments assume the form of notes accompanied 
by mortgages on the land, the farm implements, or the crops. 

Financial credit in the narrower sense is primarily bank credit, 
the instruments for transferring the funds being chiefly checks, 
drafts, and letters of credit. A check is a written order from a 
depositor in a bank directing it to pay a certain sum of money 
to the person designated, who may then by indorsement nego- 
tiate the check further. A check may be certified by the cashier 
stamping that word across its face and adding his name at the 
bottom, in which case the depositor's account is at once debited 
with the amount, the certified check becoming the bank's 
promise to pay rather than an order on the bank to pay. A 
cashier's check is an order on a bank signed by the cashier and, 
like the certified check, is really a promise to pay on the part 
of the bank. An ordinary check, although technically only 
an order on the bank, has become legally an implied promise 
to pay on the part of the maker or drawer of the check. A 
bank draft is a written order addressed by one bank to another 
directing the payment of a certain sum to a third party. The 
first bank is said to draw upon the second, where it keeps a de- 
posit or has funds to its credit. If, however, the first bank 
does not desire to do this, and if its customer wishes to remit 
money, the bank gives him, in exchange for his own check, 
what is known as a bank certificate, or certificate of deposit, 
payable to the order of a certain payee. Finally, a letter of 
credit is a document issued by a bank (or banker) directed to 
its correspondents abroad, authorizing the holder to draw upon 
the issuer or some central agent, up to a certain amount and 
within a certain period like one or two years. As the holder 



§ 199] Development of Banking 501 

usually draws the sums by instalments through the medium of 
a draft or bill of exchange, the amounts so drawn are noted on 
the letter, showing at a glance how much of the credit remains 
unexhausted. 

Commercial, industrial, and agricultural credit all finally 
converge in the bank, which is the lender par excellence. Since 
modern credit operations centre in the bank, the study of credit 
is in large measure the study of banking. 

199. The Development of Banking 

The word "bank" was formerly supposed to be derived from 
the banc or bench on which the early money-changers kept 
their coins, so that the banker would be the "bencher," as the 
money-changers were called in Greece (rpaTreftrat) and Rome 
(mensarii). The more approved modern derivation, however, 
is from "bank" in the sense of a heap or pile, as in sand-bank 
or mud-bank. Banco in mediaeval Italy was accordingly used 
to signify a mass or fund of capital, and the early colonial "banks 
of money" in America denoted batches or issues of paper money. 
Originally designating a fund of capital, a bank has to-day 
come to mean the institution dealing in such funds. As the 
result of a long evolution the modern bank conducts three kinds 
of business, — money dealings, credit transactions, and promot- 
ing or syndicate operations. 

Dealings in actual money were the most primitive occupa- 
tion of the bankers. The early money-changers made it a 
business to exchange one form of coin for another, domestic 
or foreign. A large part of this business is still done by pri- 
vate bankers and money-brokers, although most large banks 
with international relations exchange foreign money, and all 
banks stand ready to exchange one kind of domestic money 
for another. Many banks also, when occasion demands, make 
actual shipments of money from place to place and conduct 
arbitrage operations in silver, i. e., take advantage of the mo- 
mentary discrepancies in the price fluctuations in different 



502 Credit and Banking [§ 199 

countries by purchasing in the cheaper, and simultaneously 
selling in the dearer, market. 

Far more important and distinctive, however, are the credit 
operations. These take the five forms of remittances, deposits, 
advances, discounts and note-issues. 

(i) Historically it was an easy transition for the money- 
changers, instead of returning to the individual himself an 
equivalent for the sum received, to remit, i. e. pay by remittance, 
a corresponding amount to some one in another place. To 
accomplish this, it became necessary to have in these other 
places agencies or correspondents on whom orders to pay could 
be drawn. The early bills of exchange were thus primarily 
foreign bills. At first they were not negotiable. Gradually, 
however, the custom arose of transferring them by indorsement 
and delivery, and there grew up a legal system based on busi- 
ness usages as to conditions of negotiation, presentation for 
acceptance, payment after certain days of grace, and protest 
in case of dishonor. Remittances are now also made by means 
of telegraphic and cable transfers, express orders, and govern- 
ment postal notes or money orders. 

(2) When people found that they could pay their debts 
elsewhere through the money-changers, it was again a short 
step to intrust to them sums for safe-keeping. Thus arose the 
custom of making deposits of money and bullion. In the 
mediaeval Italian towns the campsores, or money-changers and 
dealers in foreign exchange, came at the close of the thirteenth 
century to be called bancherii, or bankers, from the capital sum 
or "bank" in their possession. In London, somewhat later, 
it was the goldsmiths who performed the same function. In 
the course of time serious abuses arose in connection with the 
custody of the deposits intrusted to the private bankers, and 
finally by the act of 1584 Venice instituted the public Banco 
di Rialto or della Piazza, the first bank of modern times. ^ In 

1 The bank of St. George at Genoa in the fifteenth century, which is 
sometimes spoken of as the first bank, was indeed the first modern cor- 



§ 199] Development of Banking 503 

16 19 it was supplemented by, and in 1637 merged into, the 
Banco del Giro, or transfer bank, so called because the depositors 
could not only remove their deposits on demand but transfer 
them to the credit of some other depositor. The transfer 
could, however, be made only by word of mouth and in the 
presence of both parties. When similar causes, as well as the 
desire to secure a standard free from the fluctuations of the 
depreciated coins in actual circulation, led to the establish- 
ment of the government Wisselbank (exchange bank) in Amster- 
dam in 1609, merchants were compelled to keep their accounts 
in these assignable deposits known as bank money, for which 
the town was now responsible, and it became customary to make 
the transfers by a written order. This order, however, had at 
first to be presented in person by the payer, and became assign- 
able to the payee, who had also to be a customer of the bank, 
only the day after. When the giro banks at Hamburg and 
Nuremberg were founded in 1619 and 162 1, these written 
orders gradually acquired more of the characteristics of the 
modern check, and came into general use. We even hear of 
such a giro bank in Liibeck in the fifteenth century. 

The early banks were thus institutions receiving cash de- 
posits, dealing in bills of exchange, and making transfers from 
one depositor to another. During the nineteenth century, 
however, there developed a special form of bank designed for 
the sole purpose of securely preserving cash deposits. These 
are known as Savings Banks ^ which, in contradistinction to 
most commercial banks, pay interest on deposits, do not treat 
them as assignable by transfer, and are permitted to invest 
their funds only in specified securities. While the savings 
banks are intended primarily for small deposits, there have 
poration, its stockholders, to whom was intrusted the administration of 
certain mortgaged municipal revenues, being the subscribers to the 
government forced loan. It was called a bank because of this fund of 
capital {banco or nionte). But it did not carry on the banking busi- 
ness referred to above. 

^. Date of origin: Germany, 1765; England, 1797; United States, 1816. 



504 Credit and Banking [§ 199 

arisen still more recently the Trust Companies, to which larger 
sums may be intrusted. These, however, as opposed to savings 
banks, often carry on what amounts virtually to a general bank- 
ing business. Finally, many banks receive deposits of securities 
and silverware to be kept in their vaults, acting, however, in 
this respect like storage warehouses or safe-deposit companies. 

(3) As the private bankers accumulated large deposits, it 
was natural that they should begin to compete with the money- 
lenders, especially as the latter owned their own capital, while 
the bankers were able to lend the capital deposited with them 
by others. When the deposit banks, however, were first formed, 
the safe-keeping of the deposits was deemed incompatible with 
their loan to others. In the bank of Amsterdam, for instance, 
it was not until 1656, and more definitely in 1683, that the 
bank began to make advances upon deposits of coin. The 
advances took the form of the granting of a credit of so much 
bank money on the books of the bank, the depositor being 
given a receipt entitling him to withdraw it within a specified 
time upon returning the bank money. Gradually other com- 
modities besides coin and bullion were received in exchange for 
advances. From the fact that this developed at first in the 
Italian towns, it came to be known as the Lombard business, 
a term still employed in Germany to-day. Because of the 
fact that ordinary commodities are not always immediately 
salable, and because it becomes embarrassing for the banks to 
turn themselves into storage warehouses, the character of these 
advances has been much restricted, and the modern commercial 
bank limits itself to a large extent to making loans either on 
strictly commercial paper or on collaterals which are immedi- 
ately convertible into cash. Special institutions have accord- 
ingly sprung up in modern times, designed to supply the need 
of advances on these particular forms of property, and on the 
less easily realizable securities like land. Such, for instance, 
are the Agricultural and Mortgage banks abroad, and the Bond 
and Mortgage companies, Mortgage Guarantee companies, 



§ 199] Development of Banking 50^ 

Credit companies, and Loan and Investment companies in the 
United States. The Federal Reserve act of 1913, however, 
has permitted the national banks not in a central reserve city 
to loan on farm lands under careful restrictions. 

(4) Having once begun to make advances on coin or com- 
modities, it was again but a short step for the private bankers 
to make loans on more intangible security, that is, to open an 
account for him, either on his written promise to pay, or in 
some one else's order to pay. Since the promise fell due in the 
future and the banker advanced the cash or opened the account 
at once, he deducted a certain amount from the face of the note 
or order as a discount; and the operation as well as the paper it- 
self came to be called a discount. The development was grad- 
ual, until in modern times discounting has almost everywhere 
become an important function of the commercial bank. 

(5) In the meantime the banker had learned that in lieu of 
extending his credit to the customer by opening an account, 
he might issue his own promise to pay, in the shape of a banker's 
note. Such, for instance, were the goldsmiths' notes in Eng- 
land. The acceptability of these notes as a medium of exchange 
depended largely on the reputation of the individual banker, 
and the institution of banking corporations with these powers 
was designed to increase their safety. The first bank of issue 
was the Bank of Sweden, founded originally as a private institu- 
tion in 1656, but converted into a government bank in 1668. 
The earliest important private banks of issue were the Bank of 
England, founded in 1694, and the Bank of Scotland in 1695. 
These differed from the older deposit banks not only in that 
they were banks of issue, but also in that they were invested 
with a corporate form. With them modern banking may be 
said to begin. Historically, in fact, the business of issue pre- 
ceded that of discount. Banks were now formed to issue notes 
to serve as currency, and the discounting of commercial paper 
grew up only very gradually. But the discount business slowly 
overshadowed the other, until at the present time, especially in 



506 Credit and Banking [§ 200 

Anglo-Saxon countries, the note-issue function has become 
subsidiary. 

Finally, banks have added to these money and credit deal- 
ings all kinds of transactions in public and private securities. 
Sometimes they act as agents for governments and for private 
corporations in cashing coupons and dividends; sometimes 
they carry on independent dealings in the arbitrage of securities; 
sometimes they participate in the new issues of government 
bonds and of industrial securities through promoting syndicates. 
Here, however, a distinction must be drawn between the English 
and American banks on the one hand, and those of the European 

continent on the other. In the former countries, where the 

« 
deposits are of vastly greater extent than in the latter, it is not 

considered prudent to jeopardize the liquid assets by such 

industrial investments, and in the United States in especial it 

is the Trust Companies rather than the banks which aid the 

private bankers in financing the industrial syndicates. 

200. Modern Bank Operations 

Of all these various classes of business the credit transac- 
tions have become the most important and the most distinc- 
tive. The chief function of a modern bank may thus be 
declared to be that of dealing in credit or of rendering credit 
mobile. This is now accomplished primarily by the three opera- 
tions of discount, deposit, and issue. 

(i) A business man finds that in order to meet some past 
or future obligation he needs funds. If he has sold goods on 
credit, he usually receives a promissory note on which the 
bank will give him a sum equal to the par value of the note less 
the interest during the time that the note has to run. This 
deduction involves a discount, and to discount a note thus 
means to pay its face value less the interest still to accrue. 
Legally, the transaction is a sale or exchange of rights: the 
bank buys the note or the right to demand payment from the 
maker, and sells to the merchant the right to demand payment 



§ 2oo] Modern Bank Operations 507 

from it. Economically, the transaction is a loan, because the 
bank virtually lends to the merchant the use of the capital repre- 
sented by the note (less the discount). The bank thus lends 
its own credit in the form of a contract for the future delivery of 
money. It is for this reason that bank credit is sometimes 
spoken of as a "short sale" of money. 

The borrower, in lieu of presenting some other man's promis- 
sory note for discount, may offer his own, either in person or, as 
is customary in England and America, through the bill-broker 
or note-broker. He may also offer some other form of commer- 
cial paper mentioned in § 198. The bills receivable, or the 
paper thus acquired by the bank are called discounted bills, or 
in America simply discounts. They really become part of the 
investments or securities of the bank, and in England they are 
classed under the head of the private securities. Frequently 
the borrower will desire to borrow on collaterals — that is, on 
securities, like government bonds and corporate stock or bonds. 
The loans made in this way are usually called advances in Eng- 
land, and classed as such under either the public or the private 
securities held by the bank. In the United States they are 
included with the others under the single category of "loans 
and discounts;" properly so, because the principal evidence of 
debt which together with the collateral is put into the "loan 
envelope" is, in the case of time loans, usually a promissory 
note or, in the case of call loans, a "stock note" which em- 
powers the lender to close out the collateral in case of default. 
Loans and discounts, or, as they are called in England, bills dis- 
counted and temporary advances, thus form a part of its assets, 
because they represent sums due to the bank by the borrowers 
or their assignees. 

(2) The question now arises as to the shape in which the 
bank lends its credit. When a bank discounts commercial 
paper, it may, instead of paying actual money, place on its books 
an equivalent sum to his credit. In other words, it may open 
in his name an account, which can be drawn out on demand 



5o8 Credit and Banking [§ 200 

by check. This deposit, thus becomes a liabiHty of the bank: 
the bank owes the amount to the depositor. Deposits and 
discounts hence figure on opposite sides of the bank's balance 
sheet. The deposits represent bank liabiUties; the loans and 
discounts represent bank assets. 

A deposit may also arise without any discount, as when one 
hands to the bank a sum of money or a credit instrument like 
a check which is immediately payable and collectible without 
any discount. In every case, however, the deposit gives the 
depositor a right to draw on the bank to the extent of the de- 
posit. Legally, a deposit is, therefore, a sale of money or 
money's worth in exchange for a right to demand a correspond- 
ing sum at any time in the future. The deposit may be one of 
money or of bank credit. In former times, as we have learned, 
the banks dealt only in cash deposits; nowadays they deal pri- 
marily in credit deposits. A properly managed bank will 
always endeavor to keep the discount elements in the deposits 
of such a high character that they are virtually as good as 
cash, i. e. speedily convertible into cash. 

An interesting form of deposit is found in Scotland under 
the name of "cash credit.'* This consists of an open credit 
or drawing account granted by the bank to some one vouched 
for by at least two "cautioners" or sureties. These credits 
are generally given in sums of from £ioo to £500, and the cus- 
tomer is expected to draw on the bank only in instalments, 
interest being charged on the amounts actually drawn. A 
cash credit, which is thus a right to overdraw an account up 
to a certain point, is more economical than an ordinary loan, 
and is peculiarly fitted for frugal but enterprising small mer- 
chants, and for a country where large operations in ordinary 
commercial paper are infrequent. 

(3) Sometimes the borrower who presents the note for dis- 
count elects to receive money. In place of giving coin or govern- 
ment paper, the bank may prefer to issue its own promissory 
notes. So far as the bank and the borrowers are concerned, the 



§ 200] Modern Bank Operations 509 

economic essence of the bank note is identical with that of de- 
posits. Both are bank liabilities, because the bank must ulti- 
mately pay its note or honor a requisition on the deposit; both 
involve the granting of credit to the borrower, who acquires the 
right to demand payment of a given sum from the bank. The 
function of issue differs in form, but not in substance, from that 
of deposit. So far as the borrowers are concerned, it often makes 
little difference to them whether they secure the means of pay- 
ment through actual money or through the possibility of draw- 
ing checks or drafts on the bank. It is for this reason that 
checks and drafts are sometimes spoken of as deposit currency 
in contrast to the note currency. They differ from bank notes 
in that they are not usually made out for even sums, and that 
they cannot be transferred without indorsement. To this ex- 
tent they form credit of limited, rather than of general, accept- 
ability and are not available for ''change" or till money. But 
for all the larger payments which ordinary merchants have to 
make, the credit in the form of a deposit is equally as good as 
the credit in the form of a bank note. Moreover, since bank 
notes are credits to the borrowers, they are liabilities of the 
bank. Bank notes, like deposits, are liabilities of the bank in 
contrast to loans and discounts, which are assets. 

These three operations of discount, deposit, and issue com- 
prise virtually the whole of modern credit transactions. For of 
the two other categories of credit operations referred to in the 
last section, namely advances and remittances, the former are 
now really only a species of discount, and the latter are 
accomplished by means of a combination of discount and 
deposit. 

The most significant fact in the evolution of credit is the 
growth of modern deposit banking. In the early banks, like 
those of Venice or Amsterdam, the deposits, which were in 
cash and insignificant at best in comparison with the total 
exchanges, were designed primarily to serve as a medium of 
transfer between the actual depositors. In modern times de- 



5IO Credit and Banking [§ 200 

posits are not alone chiefly credit deposits arising from dis- 
counts, but perform, through the means of checks and deposits, 
a most important service as substitutes for money. The use 
of modern deposits with the check system is everywhere, as 
we have seen, subsequent to that of bank notes. In unde- 
veloped communities, where ordinary business transactions are 
largely of a retail character, the most obvious business of the 
bank, as well as its chief source of profit, is to issue to the public 
its own promises to pay in the form of bank notes. It is only 
as the transactions grow in magnitude that commercial paper 
is offered for discount, and it is only as the confidence in the 
bank increases that deposits develop on a large scale. 

It is accordingly only in the most advanced commercial 
nations, like England and the United States, that deposits play 
such a great role. In the first half of the nineteenth century, 
when the deposits in the American and English banks were 
small, the banking problem was wellnigh exclusively that of 
note issue. At the present time in the United States there are 
many banks which do not take advantage of their privilege of 
note issue. On the other hand, on the European continent, 
deposits are still relatively insignificant. 

The widespread employment of checks has led to special 
arrangements for liquidating the mutual liabilities of the banks 
through the device of clearing houses. To obviate the necessity 
of repeated payments to-and-fro, the banks devised an institu- 
tion in which the reciprocal claims are adjusted or "cleared" 
by being set off against one another, with a payment of the 
uncancelled balances only. Even these payments, moreover, 
are frequently made, not in cash but, as in New York, in clear- 
ing-house certificates, which represent deposits of gold. The 
clearing-house coin certificates (not to be confused with the 
clearing-house loan certificates described in the next section) 
are used only for this purpose, and may be counted as part of 
the bank's lawful reserve. The London clearing house dates 
from 1775, that of New York from 1854. In 1913 the volume 



§ 20I ] Bank Reserves 5 1 1 

of exchanges in the 162 clearing houses of the United States 
amounted to over 173 bilKons of which nearly sixty per cent 
was recorded in the New York clearing house alone. Bank 
clearings are now also effected within the Federal Reserve system 
through the Gold Settlement fund and the Federal Reserve 
Agents fund. In 191 8 the combined clearings and transfers 
amounted to over a billion a week, involving a change of as little 
as I % in the ownership of the gold in the fund. On the European 
continent the clearing houses are both more recent and less im- 
portant, partly because of the central bank, partly because of 
the smaller use of checks. 

201. Bank Reserves 

The chief danger to a bank's solvency arises from the ina- 
bility to meet demand obligations. The bank must therefore 
keep in reserve in cash, or what is actually equivalent to cash, a 
sum sufficient to pay all probable demands for cash. This is 
called the reserve, and this reserve was the original "bank" 
or pile on which the mediaeval banks did business. It must 
not be confused either with the so-called "reserve" of the 
continental banks in Europe, which is Equivalent to what we 
term the "surplus," or with the "reserve-capital," which in 
England is often used to designate the unpaid capital that must 
be supplied in certain emergencies by the shareholders of the 
English joint-stock banks. 

The problem of the reserve may conveniently be discussed 
under the four heads of the character, the composition, the 
amount, and the protection of the reserve. 

(i) Since the demand liabilities are composed of bank notes 
and deposits, the character of the reserves will vary with the dif- 
ferent proportion of these elements to each other. On the 
European continent the reserve is held primarily against the 
issues; in England and America, where the deposits far out- 
weigh the issues, the question is chiefly one of reserve against 



5 I 2 Credit and Banking [§ 201 

deposits. We shall accordingly treat in this section primarily 
of the reserve against deposits, leaving the question of reserve 
against note issues for the next chapter. 

In the European countries, where central banks exist, it is 
customary for the smaller banks to keep their reserves as bal- 
ances in the larger institutions, or even to depend for a reserve 
chiefly on the central bank. Thus the reserve of the Bank of 
England is to a very great extent the real reserve for the entire 
country, a fact that, as Bagehot has pointed out, places on it a 
most serious responsibility. Opposed to this system of a single 
reserve is that of the multiple reserve, until recently the Ameri- 
can system, where each bank is supposed to keep its own 
reserve. In times of crisis, therefore, when the stability of the 
entire structure of credit was imperilled by the imprudence of 
a single bank, resort was taken to the expedient of combined re- 
serves. In virtue of this system, first tried in New York in i860, 
under the stress of the impending Civil War, a loan commit- 
tee of the clearing house was empowered to issue to any bank, 
on pledge of securities, certificates of deposit known as clearing- 
house loan certificates which enabled the weaker banks to expand 
their loans and which were accepted by the others in lieu of 
cash. The experiment was repeated in 1861, 1863, 1864, 1873, 
1884, 1890, 1893, 1907 and 1914, and the certificates were author- 
ized, but not issued, in 1895. In i860 and 1873, when the issues 
were limited to ten and twenty millions respectively, the 
equalization of reserves was effected by the provision that the 
stronger banks should turn over a balance to the weaker 
ones. This provision was, however, dropped after 1884. 
In 1873 the method was adopted in six more cities, in 1893 ^^ 
several more and in 1907 it spread over the whole country. 
Although action was often taken too late, it frequently suc- 
ceeded in helping to tide over the crisis, and forms an interest- 
ing illustration of the advantages, in time of panic, of the single 
or combined reserve over that of the multiple reserve. The 
further need of this device is obviated by the Federal Reserve 



§ 2oi] Bank Reserves 513 

act, under which every bank must now keep a substantial por- 
tion of its reserves in the federal reserve bank of its district. 

(2) Since the reserve is designed to meet immediate obli- 
gations, it must be composed of cash or something that is in- 
stantly convertible into cash. In countries which possess a 
legal-tender paper currency, the paper is sometimes counted 
as a part of the reserve, but as this cannot ordinarily be used 
in the settlement- of international debts, there must obviously 
be a reserve of coin even for the paper. Other components of 
the reserve may consist of demands upon other banks and 
individuals which are immediately realizable, and which in 
America are included under the rubric "cash-items." 

When we leave the actual cash and cash-items, we reach 
more debatable ground. Ordinary or even "gilt-edge" and 
government securities are no substitute for a cash reserve, be- 
cause in times of trouble they may not be salable at any price. 
The same may be said of long-time commercial paper, which 
although perhaps perfectly safe, is not instantly convertible. 
It is obvious that those banks are in the strongest position 
which hold in their portfolios short bills that have only a few 
days to run and that have been rediscounted by other strong 
banks. At bottom, however, in order to inspire complete 
confidence and to insure at least relative security, cash demands 
can be met only by cash assets. 

Under the American National Bank system the reserve must 
consist of "lawful money," by which is meant gold coin and 
bullion, silver dollars, and the gold certificates, silver certifi- 
cates, greenbacks, and treasury notes. "Lawful money" 
includes in fact all the forms of paper currency except national 
bank notes and the new federal reserve notes. But "lawful 
money" must not be confused with "legal-tender" money; 
for silver dollars and silver and gold certificates are not full 
legal tender, although they are "lawful money" for purposes of 
the reserve. The same is true of the Clearing House certifi- 
cates. Finally the legal reserve might include, until 19 14, not 
. 33 



514 Credit and Banking [§ 



201 



only the redemption fund of five per cent of its circulation, 
kept by each bank at Washington, but also the "reserve agents' 
balances." This refers to the provision permitting ordinary 
banks to keep three-fifths of their reserve on deposit in the 
reserve cities, and banks in the reserve cities to keep one-half 
of their reserves on deposit in the central-reserve cities.^ Under 
the new law the 5 % redemption fund may no longer be counted 
as a reserve, and the privilege to keep the reserves in the reserve 
or central-reserve cities disappeared in 191 7. But one half 
of the reserves kept by any bank in the federal reserve bank 
may henceforth consist of approved commercial paper. 

(3) The proper amount of the reserve is sometimes fixed 
by law. In the United States, national banks in the reserve or 
central-reserve cities were compelled until 1914 to keep a reserve 
of 25 per cent, and other banks a reserve of 15 per cent, of 
their deposits. Under the new law the federal reserve banks 
must keep a reserve of 35% of their deposits, while the reserves 
of ordinary member banks depends partly on whether the 
deposits are demand deposits (payable within 30 days) or time 
deposits. (See footnote on opposite page.) 

The Bank of the Netherlands must also keep a specie reserve 
of 40 per cent, but this is applicable to notes as well as deposits. 
Ordinarily, however, it depends on the banks themselves to 
estimate what Bagehot has well called the "apprehension 
minimum" — the point below which the community will begin 
to have doubts as to the ability of the bank to maintain specie 
payments. It was formerly often stated that a "safe" reserve 
is one-third of the liabilities. No such hard and fast rule, 

1 There are at present 47 reserve and 3 central-reserve cities. The 
laws of 1887 and 1903 permit any city of 200,000 and 25,000 population 
respectively to be made a central reserve or a reserve city, on application 
of three-quarters of its national banks. Chicago and St. Louis have 
been the only places to avail themselves of the privilege, which New 
York enjoj^ed from the beginning, of a central reserve city. Under the 
law of 19 1 3 the privilege of creating or abolishing the reserve or central 
reserve cities devolves upon the Federal Reserve Board. 



§ 20l] 



Bank Reserves 



5^5 



however, can be laid down, for the conditions vary not only from 
country to country and almost from city to city, but also with 
the changing complexion of business life. A reserve which is 
perfectly adequate at one period may be entirely insufficient at 
another; and the "apprehension minimum" will itself vary 
considerably with the character of the loans and discounts. 
In England the reserve of the Bank of England, for instance, 
has varied in the past fifty years from 42 to 52 per cent. 

A statistical study of the bank reserves in most countries 
would show marked fluctuations not only in themselves, but also 
as measured in percentages of liabilities. Of these, perhaps the 
most important are the seasonal fluctuations. In New York, 
for instance, the periodicity is marked. From January to 
April the reserves fall because the farmers need funds to pre- 
pare for planting the crops, and all the out-of-town banks call 
in their balances. After the season of planting and spring 
clothes-buying is over, the funds flow back to New York and 
the reserves remain fairly constant, except during the first week 

The original law of 1913 provided for a division of the reserves 
between the member bank and the federal reserve bank and 
varying from five per cent for time deposits up to from twelve 
to eighteen per cent on demand deposits. In 191 7 it was decided 
that all reserves should thereafter be kept in the federal reserve 
banks, and it thus became possible to reduce the reserve require- 
ments. These are henceforth to be as follows: 





Demand 
Deposits 


Time 
Deposits 


Banks not in reserve or central-reserve 
cities 


13% 
10% 

7% 


3% 
3% 
3% 


Banks in reserve cities 

Banks in central-reserve cities 



5 1 6 Credit and Banking [§ 201 

in July, when the semi-annual payment of dividends is followed 
by the Fourth of July festivities with their demands for cash. 
Toward the end of the summer more money and credit are 
needed, not only for the fall purchases, but especially for the 
movement of the gigantic crops; and by mid-autumn the re- 
serves are at their lowest ebb. It is not until the beginning of 
November, after the cessation of the autumnal drain, that the 
advance is again perceptible. Interesting correlations have 
been worked out by Norton, Palgrave, and others as to the 
ratio of reserves to deposits, and of reserve deviations to call 
discounts, and have been suggested as to the ratio of loan devi- 
ations to foreign-exchange rates. The fluctuations in the re- 
serve are not only periodical or seasonal, but also irregular and 
unpredictable, owing to exceptional domestic demands or inter- 
national complications. Too high a reserve endangers profits; 
too low a reserve imperils solvency; here, as elsewhere, the 
balance must be struck between cupidity and timidity. 

(4) The simplest method of protecting a dwindling reserve 
is to stop lending. Thus, when the reserves of the national 
banks fall below the legal minimum, the law prohibits them 
from increasing their liabilities by making any loans or dis- 
counts until the reserve has been restored. This, however, is 
an heroic measure, which sometimes defeats its own object. 
For it is precisely in times of monetary stringency that the 
greatest liberality is needed. Many an incipient panic has 
been checked by the mere knowledge that the banks were 
ready to extend their loans, on the familiar psychological prin- 
ciple that when a man believes he can get a thing he is not so 
anxious to secure it at once. The more usual and less drastic 
method, therefore, of protecting the reserve is by a practice 
which is especially suitable in case of a slow and gradual drain, 
namely, by increasing the rate charged. In Europe this is gen- 
erally called the discount rate, and in England the bank rate, 
because the Bank of England is the chief lender; but in the 
United States, where up to 1914 most of the bank advances 



§ 20l] 



Bank Reserves 



517 



took the shape of call loans in New York with the interest pay- 
able at the maturity of the loan, it has hitherto been called the 
money rate. Under the new law, however, there will now 
also be a discount rate. In countries like France, where the 
banks are at liberty to pay out either gold or silver, it is cus- 
tomary to charge a slight premium on gold instead of, or at all 
events prior to, raising the discount rate. 

To the general public an increase in the discount rate is 
always unwelcome; but, as in so many other domains, a sta- 
bility of rates, even with a moderately high level, is preferable 
to the continual fluctuations which unsettle business. In Eng- 
land the bank rate from 1844 to 1900 varied normally from 
two to four per cent, with occasional but increasingly rare vari- 
ations up to ten per cent. The following table gives the rela- 
tive number of days in this entire period on which the respective 
bank rate was charged: 



Bank Rate 


Number of Davs 


Bank Rate 


Number of Davs 


Per cent 


Percentage of Whole 


Per cent 


Percentage of Whole 


2 


16.6 


. 5i 


1-3 


2^ 


14.6 


• 6 


43 


3 


23-9 


6i 


.4 


3i 


8.4 


7 


2.8 


4 


13-1 


8 


1-3 


4i 


2-3 


9 


•5 


5 


9.8 


10 


•7 



In the Reichsbank and the Bank of France the range of 
variation was smaller. The maximum was 9 per cent against 
10 per cent in England, and the minimum in Germany was 3 
per cent; while a rate of over 7 per cent was reached in only 
two years, and a rate of over 8 per cent only one year in France 
and Germany as against four years in England. Moreover, 
the range of the annual fluctuations is greater in England than 
in France or Germany, having exceeded 3^ per cent only once 



5 1 8 Credit and Banking [§ 202 

in France and twice in Germany, as against eleven times in 
England; while there were in France 20 years and in Ger- 
many 9 years, but in England only 3 years, without any fluctu- 
ations at all. The figures for England, however, are sta- 
bility itself when compared with the New York call rate for 
money, which varies from day to day, and which has several 
times reached a minimum of f of i per cent and a maximum 
of 186 per cent, rates of 10, 15, 20, and 25 per cent not being 
at all uncommon. The reasons for this remarkable fact will 
be discussed in the next chapter. 

It is obvious from what has preceded that successful banking 
depends largely on the management of the reserve. The sol- 
vency of a bank and its capacity to extend credit facilities 
are far more than a matter of concern merely to the stock- 
holders and the immediate customers. The modern bank is, 
so to say, the nerve centre of the business world. A shock to 
its credit at once ramifies throughout the community, and its 
failure may paralyze enterprises that seem to be only remotely 
connected with the particular interests involved. The problem 
of bank reserves is the one of central importance in the subject 

of credit. • 

202. Credit and Prices 

It is from this point of view, therefore, that we must approach 
the question of the influence of credit upon prices. Some 
writers, Hke Mill, assert that since credit virtually means pur- 
chasing power, credit acts on prices exactly as money does. 
On the exchanges cotton and wheat futures are no less instru- 
mental in fixing prices than cash sales. So here, instead of 
transacting business with "spot gold,'' "gold-futures" or credit 
are used. The greater the use of credit, the larger the number 
of purchases, and therefore the higher will be the level of prices. 

This theory of the substantial identity of credit and money, 
as purchasing power, overlooks the fact that in a credit opera- 
tion only one-half of the transaction takes place now. Where 
money is used, the transaction is completed at once, — money 



§ 202] Credit and Prices ^ i q 

and commodities change hands; where credit is used, the com- 
modity changes hands now, but the debt incurred must be paid 
in the future. In other words, it is a question not simply of 
purchasing power, but of liquidating power. This considera- 
tion has led writers like Walker to assert that credit has no in- 
fluence at all on prices, because the debts created by such a 
transaction are ultimately cancelled by the credits. 

The truth lies midway between these two positions. If all 
credit operations were absolutely automatic, and if confidence 
in ultimate payment were so complete that actual money were 
never demanded, credit would be a perfect substitute for money, 
and influence prices just as money does. In point of fact, how- 
ever, confidence is never so complete. The banks must always 
keep a certain amount of money on hand to meet possible de- 
mands. The debts, in other words, are never entirely cancelled 
by the credits because, as the future ripens into the present, 
the conditions of the market change. There will always have 
to be a certain balance which a prudent bank must retain. 
This balance measures the' real influence of credit on prices. 
It is quite true that credit is purchasing power, and thus tends 
to raise prices; but credit is not to the same extent liquidating 
power. In order to serve as a basis for the credit operations 
a certain quantity of coin must be impounded as a reserve. 
Thus the medium of the entire transaction is in the broad sense 
the credit less the reserve: as purchasing power the credit 
alone operates, as liquidating power the credit must be supple- 
mented by the reserve. Since the money so reserved is sub- 
tracted from what would otherwise enter circulation, there is 
less money disposable for actual cash transactions, or, in other 
words, the price level is lower than it would otherwise be. The 
credit thus tends to raise prices, the reserve to lower prices. 
The reserve, however, is always much smaller than the credit 
transactions, for there would otherwise be no advantage in using 
credit. The net result, therefore, is that credit raises prices to 
a certain point. 



520 Credit and Banking [§ 202 

Credit, in other words, although it exerts by no means the 
same amount of influence on price that money does, exerts 
the same kind of influence. The reason that it does not exert 
'the same amount of influence is that a portion of its ideal 
efficacy as a substitute for money is lost through the necessity 
of keeping on hand a reserve for which no substitute can be 
employed. The extent of this reserve is a measure of the in- 
completeness of the substitution, and therefore of the degree to 
which credit fails to equal money in affecting price. The differ- 
ence between a ''wheat-future" and a credit or a "gold-future" 
is that a reserve is unnecessary in the one case, but requisite in 
the other. 

This also serves to explain why credit cannot increase prices 
indefinitely. It is indeed true that an enhanced use of credit 
marks a period of rising prices. It is precisely in such times, 
however, that prudent bankers will be solicitous about their re- 
serves, and make every effort either to increase their reserves 
or to diminish their loans. Money becomes "tight," the rate 
of discount rises, and the increase of price tends to arrest itself. 
A speculative mania may indeed supervene, and prudence for 
a time be cast to the winds, with a dangerous discrepancy 
between bank liabihties and quick assets. This will, however, 
lead to a crisis, to be discussed in § 209; and when the bubble 
of inflated values is inevitably pricked, the price level will again 
fall. All prices must finally be reduced to the basis of metallic 
money, and with a given quantity of money the oscillations in 
the price level, so far as the effect of credit is concerned, depend 
upon the proportion between the money in circulation and 
that used as a reserve for credit transactions. 



CHAPTER XXXI 

CREDIT AND CURRENCY 

203. References 

W. S. Jevons, Money (1879), chs. xvii, xviii, xxiv; C. F. Dunbar' 
Chapters on the History and Theory of Banking (2d ed., 1901), chs. v-vi; 
J. F. Johnson, Money and Currency (1905), chs. vii and xv; H. White, 
Money and Banking (4th ed., 1912), bk. iii, chs. ix-xvii; R. G. Hawtrey, 
Currency and Credit (1920) ;sL. H. Langston, Practical Bank Operation 
(2 vols., 1921); P. M. Warburg, Essays in Banking Reform in the U. S. 
(1914); T. Straker, The Money Market (1904); Reports and Publications 
of the National Monetary Commission (1910-1912); TKe Currency Prob- 
lem, Addresses at Columbia University (1908); E. W. Kemmerer, The 
A B C of the Federal Reserve System (1918). 

Crises, E. D. Jones, Economic Crises (1900); T. E. Burton, Finan- 
cial Crises (1902); C. Juglar, Brief History of Panics in the United States 
(trans, by Thomm, 1893); W. C. Mitchell, Business Cycles (1913); 
O. M. W. Sprague, A History of Crises under the National Banking Sys- 
tem (1910); H. L. Moore, Business Crises (1915); D. H. Robertson, 
A Study of Industrial Fluctuation (19 15). 

204. Banks of Issue 

The issue of bank notes was at first entirely free. It was 
soon seen, however, that the notes served as currency, and the 
question arose as to the nature of the steps to be taken to in- 
sure their safety. This consideration led to four distinct sets 
of problems: (i) Should the bank be a public or a private 
institution? (2) Should a particular bank have a monopoly 
of note issue? (3) What should be the character and de- 
nominations of the notes? (4) Should there be any legal 
regulation of the methods of emission? 

(i) Government banks of issue are comparatively rare. The 
chief examples are the Russian, the Swedish, and the Bulgarian 
bank. Far more common are the central banks, whose capital 

521 



522 Credit and Currency [§ 204 

is provided by private individuals, but where a considerable 
degree of control is exercised by the government. Of these the 
chief instance is the Bank of France. 

This was founded in 1800 as a purely private bank, but re- 
ceived the monopoly of note issue in 1803 and became a pub- 
lic institution in 1806, the management being henceforth vested 
in a governor and two assistants appointed by the state. Al- 
though several independent banks were in the interval accorded 
the privilege of note issue, the monopoly was re-established 
in 1848. In all the government and quasi-public banks, except 
the Reichsbank of Germany, and the National Bank of Greece 
(where, however, the monopoly will begin in 191 7), there is also 
a monopoly of note issue, and in almost all cases a system of 
branch banks. 

The Bank of England is technically a purely private institu- 
tion. But when it was founded in 1694, its stockholders were 
composed of subscribers to a loan to the government, which 
conferred upon it special privileges, and the bank has for a 
long time acted as the fiscal agent of the government. It 
is practically, although not legally, a quasi-public institution. 

In the United States there have been government banks, 
both national and state, but never with any monopoly of issue. 
The first and second Banks of the United States, which existed 
from 1791 to 181 1 and from 1816 to 1836, were private banks, 
one-fifth of the capital, however, being subscribed by the gov- 
ernment, which was represented on the board and which utilized 
the banks as fiscal agents. Many commonwealths in the South 
and Middle West established, between 1820 and 1840, banks 
managed by state officials, in which the capital was subscribed 
either in whole or in part by the state government. Such 
"state" banks existed in Kentucky, Tennessee, Missouri, Dela- 
ware, Alabama, the Carolinas, Georgia, Florida, Mississippi, 
Louisiana, Vermont, Illinois, Ohio, and Indiana, almost all of 
them, with the notable exception of the last two, being recklessly 
managed and coming to a disastrous end. 



§204] Banks of Issue 523 

(2) So far as the right of note issue is concerned, there are 
three systems: (a) monopoly of emission; (b) the mixed system, 
with the privilege of issue accorded to only a small number of 
banks; and (c) decentralization of issue. 

Monopoly of issue is ordinarily confined to the government 
or quasi-public banks. But it is also sometimes accorded to a 
purely private bank, as in the case of the Imperial Ottoman 
Bank in Turkey at present, or of the Bank of Scotland during 
the two decades after its inception in 1695. The chief examples 
of the mixed system are at present England and Germany. 

The Bank of England received the right of note issue in 
1697 with the understanding that no other bank should be 
authorized. This did not, however, mean a monopoly of bank- 
ing. For not only was "bank" used in the sense of bank of 
issue, thus in no wise preventing other classes of banking trans- 
actions by outsiders, but it did not apply, as was explicitly 
stated in 1707, to the issues of notes by individuals or partner- 
ships. The London private bankers discontinued their note 
issues before the end of the eighteenth century, but the country 
bank notes have persisted to this day. In 1826 the right of 
note issue was granted to joint-stock companies when over 
65 miles from London. In 1844, however, Peel's Act forbade 
the creation of any more joint-stock banks of issue, and pro- 
vided that when any of the existing banks (which were, more- 
over, prohibited from increasing their circulation) should 
abandon its right of issue, the Bank of England might add to 
its authorized issue two-thirds of the sums thus lapsed. In 
1844 the 279 banks had an authorized issue of £8,631,647, as 
against somewhat more than fourteen millions of the Bank of 
England; by the close of 191 2 there remained only 23 banks 
(12 private and 11 joint stock), with an authorized issue of 
£1,204,490, as against £18,450,000 of the Bank of* England. 

In Germany there was great confusion until 1875, at which 
time there were 32 banks of issue in addition to the reor- 
ganized Reichsbank. The issue of notes by these was subject 



524 Credit and Currency [§ 204 

to numerous restrictions, and it was provided that when any 
of them surrendered their right of issue, the whole of the equiv- 
alent sums were to be added to the authorized uncovered issue 
of the Reichsbank, In 1875 the banks had the right of issuing 
135 million marks of notes (as against 250 millions of the Reichs- 
bank) over and above the coin reserve; by 19 14 all but four of 
the banks had abandoned their note issues as unprofitable, the 
four still possessing the right of issuing 68,771,000 marks of 
uncovered notes as against 472,829,000 marks allotted to the 
Reichsbank. Thus Germany, like England, is on the high- 
road toward a centralization of note issue. 

The chief example of decentralization was until recently that 
of the United States. At the outset, however, the privilege of 
note issue was granted only by special charter. The democratic 
wave of the Jacksonian era replaced the charter method by the 
Free Banking system. Under this scheme, which originated in 
New York in 1838, any association could freely issue bank 
notes on complying with certain formalities. As a consequence, 
there were in 1861 over 1600 state banks of issue. When the 
national banks were created, the privilege of note issue was 
taken away from the state banks by the imposition of a ten per 
cent tax, applicable in 1866. The number of national banks has 
grown until, in June, 1915, there were in operation 7,560, each 
with its right of issue. The law of 1913, however, restricts to 
the twelve federal reserve banks the privilege of issuing the new 
federal reserve notes, and provides for the gradual retirement of 
the existing national bank notes. 

(3) The third problem mentioned above refers to the char- 
acter and denomination of bank notes. Since bank notes are 
simply promissory notes, the government does not ordinarily 
invest them with legal-tender quality. In some cases, however, 
the government signifies its willingness to receive the notes 
for public dues, as in the United States, where bank notes are 
receivable for any payments to the government except for 
import duties, and for payments by the government except 



§205] Regulation of Note Issue 525 

for interest on the public debt. In the new federal reserve notes 
these exceptions are removed. In a few countries bank notes are 
even legal tender, as in the Bank of England, the Bank of France, 
and since 1909 the German Reichsbank. In England, however, 
this applies only as long as the notes are kept convertible. 

The acceptance by the banks of each other's notes at par is 
either a matter of mutual arrangement, or prescribed by law, as 
in Germany and the United States. 

The denominations of the notes depends partly on the de- 
sire of the government to minimize the use of coin, and partly 
on the existence of other paper money. When the notes are 
irredeemable legal tender, and thus virtually fiat money, the 
minimum will naturally be smaller. In the Bank of England 
it was originally £20, but since 1793 £10, and since 1829 £5. 
During the period of bank restriction it was as low as £1, and 
during the war of 19 14 as low as 105. In France and Italy it 
is 50 francs ($10); in Germany it was until 1906 100 marks, 
but it is now 20 marks ($5), as is the case also in Scotland 
with the £1 notes. In the United States the minimum in the 
case of the national bank notes was originally $1, but since 
1879 is $5. 

205. Regulation of Note Issue 

The two theories as to the regulation of note issues arose at 
the time of the controversies preceding the English Bank act 
of 1844., They are known as the currency and the banking 
principle, respectively. The currency principle, first so-called 
by Mr. George W. Norman in 1840, was advocated not only 
by him, but by Lord Overstone and Colonel Torrens, and was 
accepted by Sir Robert Peel. The banking principle was 
championed by Messrs. Tooke, FuUarton, Wilson, and Gilbart, 
and was accepted in part by John Stuart Mill. The currency 
principle states that whereas in the case of a metallic currency 
all the specie cannot be exported, for the reason that, as the coin 
goes out, prices will fall, exports increase and money again flow 



526 Credit and Currency [§ 205 

in, on the other hand an issue of bank notes may expel the specie 
because the total volume of money, now composed of coin and 
notes, will be at least no smaller than before. Hence, to prevent 
the notes from becoming redundant, safeguards must be adopted. 

The weakness of this reasoning lies chiefly in overlooking the 
fact that bank deposits act precisely like bank notes. The ad- 
vocates of the banking principle pointed out that if the banks 
could affect prices and the stock of coin by increasing their 
note issue, they could do the same by expanding their deposits. 
A restriction on note issue would therefore in itself be futile. 
In point of fact the banking theorists denied that inflation was 
possible in either case, since both notes and deposits are issued 
in response to an actual demand. As long as bank paper is 
convertible, they claim that there can be no redundancy, be- 
cause if there were an issue greater than the real demand, the 
notes would at once automatically return to the bank. 

The truth again lies in the middle. The banking theory was 
undoubtedly correct in emphasizing the analogy between notes 
and deposits, and in stating that the aggregate of currency is not 
likely to be permanently increased by an issue of notes. It 
failed, however, to observe that as the bank notes are returned 
to the bank, specie may be paid out in exchange, and that while 
the aggregate circulation may remain the same, its proportions 
may be altered. Even though the redundant notes automati- 
cally return to the bank, it is precisely this return which may 
exhaust the coin reserve and thus jeopardize the entire issue. 

As a consequence, all nations impose some restrictions on 
bank issues which affect either the amount of emission, the 
nature of the reserve, or the character of the security. They 
are of six chief kinds: the maximum-amount, the fixed-re- 
serve, the variable-reserve, the emergency-circulation, the safety- 
fund, and the bond-deposit systems.^ 

^ Jevons: Money, 218-235, mentions fourteen different methods: the 
simple deposit, the partial deposit, the minimum reserve, the proportional 
reserve, the maximum issue, the elastic hmit, the documentary reserve, the 



§ 2os] Regulation of Note Issue 527 

(i) A good example of the first method is that employed 
in France. Apart from the requirement that all paper dis- 
counted must be three-name, the only restriction on the Bank of 
France is the fixing of issues at a maximum, originally set in 1870, 
at 1800 million francs, but reaching 6800 millions in 191 1 and 
enormously increased during the Great War. This method, how- 
ever, reverses the true principle, restricting what should be left 
free and leaving free what should be restricted. In France, 
however, the maximum is so high that it does not really act as 
a rigid check to the desirable elasticity. 

(2) The fixed-percentage reserve is found in Switzerland, 
where the law of 1905 requires 40 per cent of the circulation to 
be kept as a specie reserve. The same is true in the Nether- 
lands, with the exception that the reserve applies to deposits 
as well as to note issues, and that the restriction may be sus- 
pended in case of emergency. The Dutch method is in accord 
with the sound principle that deposits and notes are really 
equivalent forms of credit. 

(3) The variable percentage, is best illustrated by England. 
Here the regulation takes the form of a fixed limit of uncov- 
ered note issues, with a specie equivalent for additional issues. 
The Issue Department is allowed to emit notes only against a 
corresponding amount of government securities, gold, or bul- 
lion. The Banking Department must deposit with the Issue 
Department £14,000,000 of securities and for every pound of 
notes above that sum the Issue Department must hold coin or 
bullion. The business of the Issue Department is thus limited 
to exchanging notes for coin or vice versa, and if the Banking 
Department desires any notes, it, like any one else, must deposit 
specie. Under the provision referred to above, the amount of 
securities held by the Issue Department might be augmented by 

real-property reserve, the foreign exchange, the free issue, the gold par, 
the revenue pa3anents, the deferred convertibility, and the paper money 
method. They may, however, be substantially reduced to those men- 
tioned in the text. 



528 Credit and Currency [§ 206 

two-thirds of the lapsed country note issues, and the uncovered 
notes have accordingly grown to £18,450,000 by 1914. The 
total circulation during the past two decades has varied from 
about 35 to 60 millions, making the uncovered issues from a 
half to a third of the whole. 

The chief objection to the English system is that it purchases 
safety at the cost of an insufficient elasticity. In fact, on three 
separate occasions, namely 1847, 1857, and 1866, it was found 
necessary to suspend the act and to permit the issue of notes 
on government securities. Of more recent years the short- 
comings of the system have been reduced not only by the 
great growth in the actual specie reserve, but also by the in- 
creased importance of deposit as contrasted with note currency. 

(4) The system of emergency circulation was first tried in 
Germany. The Reichsbank is empowered to issue a so-called 
contingent circulation, of 550 millions, subject to the provision 
that one-third of the issue be covered by cash (coin, bullion, 
treasury notes, and notes of the other four banks) and the re- 
maining two-thirds by discounted bills. When the bank desires 
to increase its notes, it may emit a so-called excess issue on the 
payment of a tax of five per cent per annum, payable weekly. 
The chief criticism that can be urged against this scheme is the 
calculation of the excess issue according to the "contingent" 
rather than the cash reserve. For a large issue with over 
50 per cent reserve may be taxed, while a smaller issue with 
only one-third reserve, and therefore far less safe, may go un- 
taxed because not exceeding the "contingent." 

The four methods thus far discussed involve some form of 

asset currency, i.e., the system of issuing notes on the basis of 

banking assets in which a coin reserve plays a certain role. A 

radically different system was until recently found in the United 

States. 

206. The American Systems 

The American banks before the Civil War were to an over- 
whelming degree banks of issue rather than of discount, and 



§ 2o6] The American Systems 529 

may be classed under four systems: general-asset banking, the 
Suffolk system, the safety-fund system, and the bond-deposit 
system. 

(i) The issue of notes on general assets, with but few, if 
any, restrictions, was at first the usual practice. In both the 
first and the second Banks of the United States the only restric- 
tion was the limitation of the notes to the amount of capital. 
In many of the state banks even this restriction was lacking. 
The wave of ill-managed banks spread from New England to 
the South and West, until they culminated in the "wild-cat" 
and "coon-box" banks of the frontier. From 1837 on, when 
a distinct improvement began, there was, however, the greatest 
variety, ranging from the rigid requirements of Louisiana to 
the almost complete freedom in some of the border states. 

(2) The Suffolk Bank system was in effect a method to se- 
cure the immediate redemption of the notes. It rested on the 
significant distinction between ultimate security and immediate 
convertibility. The Boston banks found that they could not 
keep their notes in circulation, as they were being crowded out 
by the country bank issues which were received by them only 
at a discount. In order, therefore, to maintain the country 
issues at par, the Suffolk Bank was incorporated in 1818 and 
the system was perfected in 1824. The Suffolk Bank agreed 
to redeem at par in specie the notes of any bank which kept on 
permanent deposit with it the sum of at least $2000 plus an 
amount sufficient to redeem the notes, charging interest only 
on the excess, but agreeing to credit to any such bank the bills 
of any other bank in good standing that it might send in. The 
country banks, which at first strenuously resisted, soon found 
that, unless they consented, their notes would suffer in good 
repute. As a result the Suffolk Bank acted as a kind of clearing- 
house, each bank in the system being allowed to pay out only 
its own notes and sending to the Suffolk Bank weekly the bills of 
the other banks received by it. In this way all the notes were 
kept at par, and there was little need of actual cash redemption. 



5 30 Credit and Currency [§ 206 

(3) The Safety Fund plan was initiated by New York in 
1829. Each bank in the system was obHgated to pay to the 
state treasurer an annual sum equal to one-half of one per cent 
of its capital, until it reached three per cent. This ''Bank- 
fund" was to be applied to the redemption of the notes of any 
insolvent bank. Unfortunately it was made responsible for the 
other liabilities as well, and it was not until 1842, after several 
failures, that the fund was restricted to the notes. This was, 
however, too late, and the redemption of the notes was sus- 
pended for a time, the fund being subsequently replenished by 
mortgaging future payments. As the charters of the banks 
belonging to the system expired, the system itself melted away. 
Had the fund, however, been appHed from the outset only to 
notes, it would have been ample. The safety fund exists since 
1890 as a feature of the Canadian system. 

(4) The Bond Deposit system also originated in New York. 
Under the Free Banking Law of 1838, any bank might issue 
notes, to be provided by the state comptroller, on depositing 
with him an equivalent amount of stock of the United States, 
of New York, or of any other state approved by him. Un- 
fortunately, bonds and mortgages on real estate worth double 
the mortgage might also be deposited, with a result that the 
notes of insolvent banks which had made such deposits were 
redeemed in 1841-1842 at a discount of 25 per cent. The 
deposits were subsequently limited to Federal and New York 
stock, and the security of the notes was thereafter unquestioned. 
But in many other states which adopted the scheme, these 
safeguards were not observed, and the security was frequently 
worthless. Moreover, even when the security was ample, there 
was no elasticity. 

The result of these various methods was, in 1861, a hetero- 
geneous jumble of good, bad, and indifferent banks, with notes 
lacking in uniformity and of all degrees of acceptability. 

The National Bank system was devised to secure a market 
for the war debt, and to provide a uniform currency. The 



§ 2o6] The American Systems 531 

former object was attained by adopting the bond-deposit system 
of New York, the latter by taxing the state bank notes out of 
existence. Under the act of 1863, perfected in 1864, any bank 
with a capital of at least $50,000 could secure, from the Comp- 
troller of the Currency, bank notes not exceeding the amount 
of its capital stock and equal to 90 per cent of the market value 
of the United States bonds deposited with him. The banks were 
held to redeem these notes, not only over their own counters, but 
at selected agencies in the principal centres, known as reserve 
cities. To provide for such redemption the banks were to keep 
as a reserve in lawful money 1 5 per cent or, in case of the reserve- 
city banks, 25 per cent of the circulation and deposits. On fail- 
ure of a bank to redeem its notes, the government was to do so. 

Originally the total issues were restricted to $300,000,000. 
For various reasons the West and South had not secured their 
due proportions of note issues, and the act of 1865 accordingly 
sought to favor the smaller banks by restricting the circulation 
of the larger banks and by apportioning one-half of the circula- 
tion to the various states according to population. In 1875, 
all restrictions were swept away by the Resumption Act. The 
law of 1874 in the mean time permitted the banks voluntarily 
to reduce their circulation up to a total of $55,000,000, and it 
substituted for the redemption agencies in the reserve cities a 
system of government redemption, each bank being now obli- 
gated to keep in lawful money a redemption fund of 5 per cent 
of its circulation in the Treasury at Washington. The required 
reserve was at the same time made applicable henceforth only 
to notes, instead of to deposits and notes conjoined. 

By the act of 1882, the total amount by which all the banks 
might reduce their circulation was limited to three millions a 
month, and a bank reducing its circulation was prohibited from 
again increasing it within six months. These last provisions 
were unfortunate, for they emphasized the existing inflexibility 
of the system, not only by setting a rigid minimum limit but by 
rendering impossible any immediate rebound. 



532 Credit and Currency [§ 206 

Three points now became evident. In the first place, the 
national-bank circulation, instead of furnishing the major part 
of the paper currency, as had been originally contemplated, 
constituted only a small, and in general diminishing, propor- 
tion. Many of the largest banks in New York issued, and still 
issue, no notes at all, making their chief profits on deposits. 
In the second place, a comparison of the fluctuations in circula- 
tion, as shown in the chart on page 532, with the oscillations in 
the price of bonds convinced many that some of the banks were 
utilizing the bond-deposit provision to peculate in the bond 
market rather than to provide a currency. Thirdly, the restric- 
tion of banks to those with a minimum capital of $50,000, 
coupled with the absence of any provision for branches, pre- 
vented adequate banking facilities in the rural districts and led 
to a great spread of state banks, often with a capital as low as 
$10,000 or $5000. 

By the act of 1900 the minimum capital was lowered tc 
$25,000, the tax on circulation was reduced from i to one-half 
of I per cent, and all banks were now allowed to issue notes up 
to 100 per cent of the bonds deposited. As a consequence of 
these laws, the circulation gradually rose from 242 millions in 
1899 to 802 millions in June, 1915. In 1907 another slight im- 
provement was added by the provision permitting the banks to 
reduce their circulation by a total amount not exceeding nine 
(instead of the former three) millions a month. 

The defects of the National Bank system may be summed up 
as follows: 

(i) There was no adequate provision for banking facilities in 
the smaller places as branch banks were not permitted. 

(2) Since by far the greater part of the public debt was held 
by the national banks as a deposit for note issue, the govern- 
ment bonds acquired an artificial value, the virtual dependence 
of the public credit on the national banks militating against 
both the payment of the debt and the substitution of some 
better system of security for note issue. 



BANK-NOTES, PAPER MONEY, GOLD AND TOTAL MONETARY 
CIRCULATION IN THE U.S. FROM 1878 TO 1920 
IN MILLIONS OF DOLLARS 



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§ 207] The Money Rate ^23 

(3) The ultimate redemption of the notes was indeed as- 
sured, but there was no adequate provision for immediate and 
daily redemption. The 5 per cent redemption fund at Wash- 
ington served only to replace the soiled and mutilated notes, 
and accomplished even that object only imperfectly. Not 
only was the expense great, but the average life of the outstand- 
ing notes was about two years, whereas it was only about five 
weeks under the Suffolk Bank system, and is correspondingly 
short in Canada and Europe. 

(4) The principal defect was the complete lack of elasticity. 
In the face of the constant fluctuations in the public demand 
for credit facilities, the changes in the price of bonds might 
induce the bank to sell rather than to buy bonds when the 
community needed more money; and if by any chance more 
notes had been issued, the banks were prohibited, when the 
need for them was past, from withdrawing them at will. Thus at 
both ends there was a lack of flexibility, necessitating the trans- 
mission of actual cash to and from the communities in the 
West and South, causing violent fluctuations in the '' money- 
rate" and upheavals in the stock-market, and involving con- 
stant interference by the government in what ought to be an 
automatically regulated mechanism. Had the demand for 
credit not been met to an overwhelming degree by deposit cur- 
rency rather than bank notes, the situation would long ago have 
become intolerable. As it was, the embarrassments were great, 
and the spasmodic variations of the money rate in Wall Street 
were, as we have seen, utterly without parallel elsewhere. 

207. The Money Rate 

Fluctuations in the money rate are due to three causes, — 
the general rate of interest, the level of prices, and the state of 
the money market in the narrower sense. 

(i) The general interest rate is, as we know, the payment 
for the use of capital as a whole. The ''money rate" or "dis- 
count rate" in the long run follows the general rate of interest^ 



534 Credit and Currency [§ 207 

for a relative plethora or dearth of capital ultimately finds its 
way to the lending centres. 

We must be careful, however, not to confuse the demand 
for money in general with the "demand for money" in the 
Wall Street sense. The demand for money in general is, as 
we know, reflected in the price level, because money is needed 
primarily as a medium of exchange. But the demand for 
"money," as reflected in the "money rate," is primarily a de- 
mand for loanable funds or capital. A demand for capital is 
not necessarily a demand for money. The borrower of capi- 
tal may indeed get it in the shape of money, but the mere 
fact that one man rather than another desires to control a cer- 
tain quantity of capital does not alter the total volume of 
exchanges or the community's need for money. The demand 
for capital is reflected in the general rate of interest, the demand 
for money in the general level of prices. Although, as we shall 
see below, there is a minor correlation between interest rates 
and prices, yet so far as prices are primarily dependent on the 
other factors which influence the value of money, there may 
be high interest with low prices, or low interest with high 
prices. Interest depends on capital; prices depend on money: 
interest depends at bottom on the demand for the creation of 
new wealth; prices depend on the exchange of existing wealth. 

So far, therefore, as the fundamental cause of variation in 
the "money rate" is the alteration in the general rate of in- 
terest, the "money rate" depends on forces entirely distinct 
from the demand or supply of money. But while the actually 
existing price level cannot affect the rate of interest, the latter 
may be modified by changes in the price level. We thus come 
to the second point. 

(2) Alterations in the price level, that is, an appreciation or 
depreciation of money, may exert a temporary change in the rate 
of interest. If a man borrows $1000 during a period of falling 
prices, he will really repay at the expiration of the loan period 
more than he received. That is, in order to return the nom- 



§ 207] The Money Rate 53^ 

inally identical sum of $1000 he must sell more goods or work 
more days. As interest is really paid for capital, not money, 
and as- the prices of commodities have fallen, he is substan- 
tially paying back more capital or commodities than he bor- 
rowed. If, therefore, he is able to foresee the falling prices, 
the borrower will insist on securing a compensation by a re- 
duction in the rate of interest, and the lenders will be forced 
by competition to grant it. If competition and foresight are 
perfect on both sides, the fall in prices would be exactly offset 
by the fall in interest, or mathematically speaking and allowing 
for the compounding of interest, the rate of interest would be 
lowered by slightly more than the rate of appreciation of 
money. It is precisely because foresight and competition are 
not perfect that the interest rate is never exactly adjusted to 
this change in the purchasing power of money, and that varia- 
tions in the price level are often attended by periods of inflation 
and depression in the business world. 

Changes in the price level thus affect the rate of interest, 
and the "rate of money" in the Wall Street sense is hence 
partly dependent on the "value of money" in the broader 
sense. But it must not be overlooked that these changes are 
merely incident to a period of readjustment of prices, and that 
as soon as a new relatively permanent price level is again 
reached, this factor falls away. 

Since this change in interest is connected with an apprecia- 
tion or depreciation of money, it is clear that the longer the 
period which the loan has to run, the greater will be its influ- 
ence. It is, for instance, an interesting fact that in a period of 
rising prices, as from 1896 to the present, the rate on "time 
money" in Wall Street tends to be higher than on "call money." 

While changes in the price level thus influence the rate of 
interest, it must not be forgotten that on the other hand changes 
in the rate of interest itself affect the general price level. A fall 
in the rate of interest frequently tends to raise the price level. 
It might be objected that, as Tooke thought, since interest is one 



53^ Credit and Currency [§ 207 

of the elements in cost, low interest means low prices. It must, 
however, be remembered that lowering of the interest rate, and 
therefore an increase of credit facilities, is apt to stimulate pro- 
duction, and to usher in a period of rising prices. Other things 
remaining the same, indeed, low interest implies low cost of pro- 
duction and low prices. But when interest is lowered, other 
things rarely remain the same; and it is precisely this frequent 
concomitant in the "other things" that often causes low interest 
to be associated with higher prices. Such considerations as to 
relation of interest to prices reinforce the conclusion reached 
above (§ 193), that while a change in the supply of money 
is the chief cause of variations in the price level, it is not 
the sole cause, and that the rate of interest both affects, and 
is affected by, the general price level. 

(3) While over longer periods the money rate depends on 
the supply of capital, and while for somewhat shorter periods 
it is influenced by the level of prices, for still shorter periods it 
is affected by the temporary amount of loanable cash in the 
money market. It is this, and this only, which the ordinary 
borrower of "call money" has in mind. 

The chief borrowers of money in Wall Street are those who 
want funds for meeting immediate obligations or for margins in 
the speculative market. With the continual oscillations in the 
demand for these loanable funds, it is obvious that a comparative 
stability in the money market can be secured only by some sys- 
tem whereby the banks may expand or contract their loans at 
will without fear of depleting their reserves. 

It is patent that if the demand for funds may be met by notes 
issued on the general assets of the banks, rather than by the 
granting of bank credit in the shape of deposits, not only will 
there be a slackening of the pressure in the money market, but 
the demand for cash will be met by notes in lieu of a drain on 
the specie reserve. The almost complete rigidity of note issue 
in the United States explains in large part the former violent 
fluctuations in the New York money market. 



§ 207] The Money Rate 537 

Rigidity of note issue is, however, not the sole explanation 
of the former startling conditions in Wall Street. A matter of 
at least equal importance is the nature of the commercial paper, 
which retarded the replenishment of the reserve. 

If a man wants to borrow money in Europe, he will sell to 
a bank his own three months' bill drawn on some private 
banker willing to extend him credit. Or if he is a merchant 
who has sold goods, he will draw on his customer, get his 
banker to indorse the bill or draft, and sell it to the bank in 
the same way. The bank which purchases this banker's accept- 
ance or indorsed paper can always dispose of it to some one else, 
usually by having it re-discounted by one of the large central 
banks. In England it is the bill-brokers and discount com- 
panies which do the original discounting, and in turn secure 
advances from the bank of England. The result, however, is 
the same. The large banks keep most of their funds invested 
in these bills of exchange, and to a large extent in foreign bills. 
If the bills were simply ordinary merchants' bills, they would 
not serve for international purposes, the drawer being generally 
unknown beyond local circles. But with the acceptance of the 
bank, which is known everywhere, the bill becomes a thoroughly 
suitable means of investment and exchange. If "money 
tightens " in one country, the central banks in the other countries 
increase their investments in bills of exchange of the country 
where the rate goes up, and by purchasing this short-time paper 
tend to prevent the export of specie, sending bills of exchange 
instead. In this way not only do the banks hold paper which 
can be almost immediately turned into cash, thus replenishing 
their reserves, but the credit of the whole community, as repre- 
sented by the ordinary commercial bills and notes, is added to 
the credit of the bank as a means of international payments. 

In the United States, on the other hand, when a man bor- 
rowed money from a bank, the latter kept the note until it 
fell due. It became a dead or illiquid asset. There was no re- 
discounting of domestic paper, only the foreign-exchange bills 



538 Credit and Currency [§ 208 

being endorsed and resold. These long bills or "finance 
bills," however, drawn by American bankers on their foreign 
correspondents in foreign money, were necessarily limited in 
amount by the extent of the bankers' credit. Since the Amer- 
ican banks could look upon their discounts of ordinary commer- 
cial paper only as illiquid assets, and could invest their funds 
in the bill market, as in Europe, they lent on call in the stock 
market, which thus attracted the surplus funds of the entire 
country. Moreover, since the sum invested in call loans was 
very small compared with the total amount of money bor- 
rowed throughout the country, it follows that a sudden change 
in the supply of loanable funds was far more acutely felt 
in this small field than would be the case if spread over the 
larger area. In Europe, if money tightens, it takes the form of 
a slight rise in the rate of discount on practically all the com- 
mercial paper of the country; in America, if money tightened, 
the rate rose violently on call loans. 

The situation was further aggravated in the United States by 
the Independent Treasury system. 

The revenues were allowed to accumulate in the Treasury until 
the semi-annual payments of interest on the debt arrived, thus 
taking out of the money market the funds which might other- 
wise in the banks have served as the basis of large credit trans- 
actions, and then just as abruptly throwing the funds into the 
market. Not only had this practice helped to create a fre- 
quent stringency by locking up badly needed funds, but it had 
become customary in time of urgency to appeal to the gov- 
ernment to "ease the market" by special measures of relief, 
putting on the Secretary of the Treasury a burden of a most 
onerous and responsible character. 

208. The Federal Reserve Act of 1913 

A comprehensive scheme of banking reform in the United 
States would therefore include at least four points: modification 
of the independent treasury system; a reform in discount meth- 



§ 2o8] Federal Reserve Act of 191 3 539 

ods; a greater flexibility of note issues; and above all, as we 
pointed out in the last chapter, a centralization of reserves. 

An attempt to remedy some of the evils was made by the 
Aldrich-Vreeland law of 1908, which provided for an emergency 
currency, the use of notes on commercial assets, the formation 
of national currency associations and the creation of a com- 
mission. The machinery, however, was cumbrous, and the 
law was of a temporary character — to expire in 1915. No 
use in fact was made of it, except during the war scare of 
1914. The monetary commission reported in 191 1 and its 
fundamental recommendations, with a few not unimportant 
alterations, were embodied in the act of December 23, 19 13. 
The principal features of the law are as follows: 

I. Centralization of reserves. The country is divided into 
twelve regions with a federal reserve bank in each. Every 
national bank must, and every state bank or trust company 
may, contribute to the capital of the federal reserve bank in the 
district; and since 19 17 every member bank must keep its entire 
legal reserve in the federal reserve bank. Each federal reserve 
bank must have nine directors, six elected to represent the 
member banks and the business interests, respectively, and 
three appointed by the Federal Reserve Board. The federal 
reserve banks, which may open branches anywhere within the 
district, act as agents of the United States government and may 
keep the government funds. Their business is limited to trans- 
actions with member banks and with the government, except 
that they may deal in commercial bills, bills of exchange, gold 
coin and bullion, government bonds and notes. They must 
keep a reserve of 35% against deposits. One-half of their earn- 
ings over 6% goes into a surplus fund, until it amounts to at 
least 40% of the capital stock, and the other half goes to the 
government. 

A Federal Reserve Board of seven members, appointed by the 
President, exercises a general supervision over the reserve banks. 
It designates the chairman and deputy chairman of the board of 



540 Credit and Currency [§ 208 

directors of each bank, it may suspend or remove any officer or 
director, it may suspend any reserve requirements of the reserve 
banks, it may readjust the federal reserve districts, it may fix the 
rate of discount to be charged, it may require any federal reserve 
bank to discount for another, and finally what is most important, 
it may determine the character of paper elegible to discount. A 
Federal Advisory Council of twelve members, elected by the 
reserve banks, is invested with advisory functions, but the real 
power lies in the Federal Reserve Board. While the monetary 
commission bill provided for out-and-out centrahzation, the law 
of 19 1 3 provides nominally for a federalization of banking 
reserves, but secures to all intents and purposes the essentials of 
an actual centralization of reserves. 

2. The discount of commercial paper. Every member bank is 
authorized to accept (i) ninety day domestic paper arising out 
of commercial transactions not including paper issued for carry- 
ing securities (except those of the U. S.), but including six months 
paper issued for agricultural purposes or based on live stock; 
(2) 6 months foreign commercial bills; and (3) 3 months paper 
drawn abroad in order to furnish dollar exchange. All such paper 
when endorsed by a member bank may be rediscounted by a 
federal reserve bank which since 1916 may also loan on short time 
(up to 15 days) collateral notes. Banks not in a central reserve 
city may loan up to 5 years on neighboring farm lands up to 
50% of their value. The federal reserve bank may also carry on 
so-called "open market" operations, that is, deal directly in 
paper eligible for rediscount even without the endorsement of a 
member bank. Finally, every federal reserve bank may receive 
and transfer on demand funds and balances of member banks 
or other reserve banks, the Federal Reserve Board having the 
power to require every federal reserve bank to exercise the 
functions of a clearing house for its member banks. Thus, by 
one blow, as it were, the character of our credit facilities was 
completely changed. 

J. Note issue. The law transfers the right of note issue by 



§ 2o8] Federal Reserve Act ofi9i3 541 

gradual steps to the federal reserve banks alone. The new 
federal reserve notes, instead of being secured by bonds, are to 
be issued on the basis of discounted bills and may be put out to 
any amount, with the sole limitation that a 40 per cent reserve 
is to be kept in gold. This limit may be suspended by the 
Federal Reserve Board, but in that case a graduated tax of i 
per cent is to be imposed; and if the reserve falls below 32 
per cent a farther tax of i| per cent is to be imposed for every 
2^ per cent deficiency of reserve below 32^ per cent. This 
tax, moreover, is to be added to the rate of discount as fixed by 
the Federal Reserve Board. In order, however, to prevent the 
sudden throwing upon the market of the 2 per cent bonds which 
have hitherto served as a basis of the national bank circulation, 
it is provided that not more than $25,000,000 a year of the 2's 
shall be turned over by the national banks to the reserve banks. 
The federal reserve bank may also issue its own bank notes 
on the same bond security as the old national bank notes; but 
if it prefers not to do so, it may exchange one-half of these 2's 
for one year gold notes and the other half for 3's, without the 
circulation privilege. The obligation to purchase the one-year 
gold notes at the discretion of the Secretary of the Treasury 
may continue for thirty years, so that it will be at least a quarter 
of a century before the present national banknotes entirely 
disappear. In May, 191 9, there were in circulation 2,521 millions 
of federal reserve notes and 152 millions of federal reserve bank- 
notes, while the national banknotes had fallen to 653 millions. 

The advantages of the new system may be summarized as 
follows : 

I. Mobilization of credit. The substitution of bankable 
commercial paper in the place of bonds not only insures a flex- 
ibility of credit, which was hitherto lacking, but greatly en- 
larges the field of banking operations. The banks, instead of 
being restricted to call loans on the stock exchange and to 
investment in illiquid assets which repose quietly in their 
portfolios, now enjoy an opportunity of extending their opera- 



542 Credit and Currency [§ 208 

tions to a far wider field of business activity, and of immediately 
converting the commercial paper into cash, if need be. Instead 
of remaining immobile, the assets of the American banks at once 
become flexible and mobilized. 

2. Insurance against disaster. Under the system hitherto, 
at the least sign of trouble, each banker sat tight on his own 
little reserve and became suspicious of his neighbor. Under 
the new system, he has a great part of the reserve of all the 
member banks to fall back upon. Instead of jealousy, there 
is co-operation; instead of fear, there is confidence. Just as 
the individual householder uses the fire insurance company 
against the risk of conflagration, so the individual bank uses 
the federal reserve banks as its insurance against catastrophe. 
Without the new system it would have been almost impossible 
to finance the Great War. 

J. Democratization of facilities. The small bank was hitherto 
dependent upon its own little capital and insignificant credit. 
Under the new system its assets are no longer locked up, but it 
can at once rediscount its paper at the federal reserve bank and 
it is thus able largely to increase its facilities. Moreover checks 
are now collected without discount and transfers of money are 
made without actual shipment. 

4. Internationalization of business risks. Until 19 14, if the 
credit situation differed in this country from that abroad, we 
were virtually prevented from taking prompt advantage of the 
difference. In the crisis of 1907, for instance, when the replenish- 
ment of our gold supply became necessary, it was impossible 
to secure a large remittance from France, although in a similar 
emergency a decade previous England was in this way able to 
ward off disaster. Under the new system, the United States 
has entered the concert of nations and has begun to take advan- 
tage of reciprocal facilities through its power to deal in foreign 
commercial bills and to conclude loans of gold. Just as the 
federal reserve banks, in their national transactions, have 
decreased the risks of local banks, so in their international 



§ 209] Credit and Crises 543 

transactions they have diminished the risks of all banks. In 
the Great War this aid has been invaluable. 

5, Participation in world-wide profits. Hitherto, when an 
American had commercial dealings with South America or 
Asia, he paid by bills drawn, not on New York, but on London. 
London has been for over a century the world's financial 
center, and the banking commissions of the world's business 
amount to many millions a year. With the prodigious foreign 
trade of the United States there is no reason why a substantial 
share of these millions should not come to this country. Stimu- 
lated by the Great War, so-called dollar exchange has been de- 
veloping fast since 191 5. The American banker of the future 
will have a wider horizon and a broader opportunity, and if 
he avails himself of his opportunity there is no reason why the 
world's financial center should not ultimately be shifted from 
England to the United States, just as at the close of the eigh- 
teenth century it was shifted from Holland to England. 

209. Credit and Crises 

Crises are sometimes classified as financial and commercial 
or industrial crises. In point of fact, since the bank is the 
nerve center of modern business, all Crises are financial crises. 
What is meant by the alleged distinction is that in some 
cases attention is directed to the immediate occasion of the 
crisis in the shape of bad banking or bad currency or stock- 
exchange speculation, while in other cases regard is paid 
to the underlying cause in the general conditions of busi- 
ness. 

Crises are essentially modern phenomena. They are a 
product of the new system of business enterprise, built upon 
capital and credit. Sporadic instances are found in earlier 
centuries, but it is only since the domination of the factory 
system that crises have become a regular occurrence. During 
the nineteenth century a certain rough periodicity may be ob- 
served in the world crises transmitted from country to country. 



544 Credit and Currency [§ 209 

The important ones were those of 1825, 1837, 1847, 1857, 1873, 
1884, 1890, 1893, 1900, 1907 and the war panic of 1914. 

The surface facts of the phenomenon are famihar. There is 
a rhythmic movement in all modern business. At a certain 
period "times are good," prices rise, all manner of new enter- 
prises are launched, bank facilities are extended, and prosperity 
is found on every side. Then in the height of this period of 
exaltation, something happens to disturb confidence. A chance 
occurrence, a mere rumor, may suffice. Some bank or financial 
institution considers its credit too heavily engaged or suspects 
that the collateral deposited with it for loans is inadequate. 
Just at the flood of the tide, when new demands are constantly 
being made, it finds itself unable or unwilhng to respond. Its 
refusal intensifies the feeling of insecurity, and with the inability 
of some important concern to meet its obligations a failure 
occurs. At once every other institution takes in sail, and en- 
deavors to realize on its collateral; that is, creditors demand 
payment and debtors, in their frantic effort to pay, sacrifice 
securities, often in vain. Prices fall with a thud, failure' suc- 
ceeds failure, and the panic is complete, carrying in its wake 
loss and suffering to every part of the economic community. 
Then follows a period of more or less long continued depres- 
sion, low prices and "hard times" with chronic unemploy- 
ment and low wages, until gradually the wave of prosperity 
again sets in, and the process repeats itself. 

According to the point of view from which the subject is 
approached, the explanation usually given is that of overpro- 
duction or underconsumption. The theory of overproduction 
states, not that there is a general glut of commodities^ 
for that would imply that there can be too much wealth, 
which is absurd — but that there are more goods than can 
be sold at a profitable price. Whether this overproduction 
starts with particular commodities and becomes relative over- 
production or extends to all commodities and becomes general 
overproduction is immaterial. The remedy for crises then 



§ 209] ' Credit and Crises 545 

would be to produce less, either of certain things or of all 
things. On the other hand, the theory of underconsumption 
emphasizes the inability of the consumer to pay enough to 
keep the industries going. Were the consumer to save less and 
to spend more, crises might be averted. 

The true explanation of crises is somewhat different. The 
whole problem is one of capitalization. All investment values 
are, as we know (§ 117), the result of the capitalization of esti- 
mated earnings. The factory system is one of mass production 
for the anticipated market, not of production to order for a 
given market. Even if it be said that modern steel mills only 
fill definite orders, it is none the less true that immense plants 
are constantly being erected in the expectation that orders will be 
received in the future. A period of good times may be initiated 
by large orders for some particular business, — due, for instance, 
to a new navy programme, to internal improvements, to a war 
or to any other large demand. Prices rise in that business, pro- 
duction increases, the movement spreads to other lines, and the 
new enterprises are financed by loans from the banks or by the 
sale of securities on a capitalization proportionate to the antici- 
pated earnings. The psychological character of these credit 
transactions is such, as we have seen, that the capitalization will 
inevitably be put too high. The hoped-for earnings do not 
come in an amount sufficient to justify the investment. It 
becomes necessary to reduce the capitalization to its true 
market value on the basis of actual earnings. This process of 
readjustment of overcapitalized values necessarily involves loss; 
but readjustment there must be. If the realization of its neces- 
sity is sudden, we have a crisis or panic; if it can be brought 
about gradually, we have a process of liquidation. In any event 
there follows a period of depression, which must continue until 
the readjustment of capitalization to actual earning capacity has 
become complete. 

Crises therefore are not necessarily a result of increased tech- 
nical production. The important point is not production, but 
35 



546 Credit and Currency [§ 209 

capitalization. The crisis of 1837 was due to the overcapi- 
talization of land values; the liquidation of 1903 to the over- 
capitalization of trust values. In neither case was there any- 
increased production. Overproduction may indeed accompany 
overcapitalization, but the emphasis is to be put on the discrep- 
ancy between the investment and the returns. In this sense 
all crises and depressions are credit phenomena. 

Inasmuch as modern business enterprise is based on credit, 
it is obvious that even an ideal banking and currency system 
cannot in itself avert crises. It may mitigate the evils by pro- 
viding great elasticity and preventing the shock of a sudden 
panic; but the ultimate readjustment must come. More, how- 
ever, is to be hoped for from the newer tendencies in the organi- 
zation of economic life. With the growth of the business unit 
and the integration of modern industry it is possible to dis- 
cern the beginnings of a more equable and better regulated 
method of enterprise and capital investment. With every decade 
panics are visibly becoming less severe. Like some of the other 
economic evils of the nineteenth century discussed in the pre- 
vious book, financial crises seem to be peculiar to the infancy 
of the factory system. Here, as elsewhere, the task of the future 
consists in retaining the advantages of a healthy competition 
while doing away with its abuses. Rhythmic oscillations in 
prosperity and adversity will no doubt continue to occur in busi- 
ness life as elsewhere. But with a better grasp of the principles 
of credit, with an increasing responsibility of promoters to in- 
vestors, with a more stable demand on the part of the wage- 
earning consumers, and above all with the more efficient 
regulations of production through the newer forms of business 
enterprise we may reasonably look forward to a fairly successful 
adjustment of capitalization to real earning capacity and to. a 
more complete adaptation of the present to the future. When 
this stage is reached, credit will be shorn of its lurking dangers 
and will stand forth in its true light as an unmixed benefit to 
solid economic progress. 



§ 209i] The Federal Farm Loan Act 546* 

209^. The Federal Farm Loan Act 

The discussion of credit would not be complete without a 
word as to agricultural credit. The granting of better facilities 
for rural credit has of recent years engaged the earnest attention 
of the American thinkers and statesmen. The movement has 
culminated in the passage, in i9i6,of the Federal Farm Loan Act. 

The law provides for an organization patterned on the 
federal reserve system. The country is divided into twelve 
districts, each with a Farm Land Bank and under the general 
supervision of the Federal Farm Loan Board at Washington. 
The Farm Loan Board is composed of five members with the 
Farm Loan Commissioner at the head and represented in each 
district by a Registrar. 

Any ten or more persons who own land and desire to borrow 
on the land may form a National Farm Loan Association, with 
a board of at least five directors and a loan committee of three 
members. The capital stock of these associations is in shares 
of $5 each, and every applicant for a loan must take stock to the 
extent of five per cent of the amount of the loan, the stock to be 
retired when the loan is paid off. The applications for a loan 
are forwarded to the Farm Land Bank of the district, or to its 
branches which may be approved by the Farm Loan Board. 
The Land Bank must then have the land appraised by its own 
officials and may make a loan not to exceed fifty per cent of the 
value of the land mortgaged and twenty per cent of the value 
of the insured improvements. No loan can be less than $ioo 
or more than $10,000. 

The Farm Loan Associations are required to endorse and to 
become responsible for, the payment of the mortgages. The rate 
of interest on loans cannot exceed six per cent, exclusive of pay- 
ments for the amortization of the loan, which must be effected 
in not less than five, or more than forty, years. 

The capital of the Farm Land Banks is expected to be owned 
by the National Farm Loan Associations, The stock may, how- 



546** The Federal Farm Loan Act [§ 209J 

ever, also be subscribed by the public. If the stock is not sub- 
scribed by either the association or the general public it is to be 
paid in by the national government. No stock shall have any 
voting rights except shares owned by the government and by 
the Farm Loan Associations. Stock owned by the government, 
however, is to receive no dividends. 

The Land Banks may apply to the Farm Loan Board for per- 
mission to issue bonds secured by these mortgages. The rate 
of interest on these farm loan bonds cannot exceed five per 
cent. Every Land Bank is primarily responsible for the bonds 
issued by it; but in case of default the issues of each bank are 
guaranteed by all the other banks. The Land Banks and the 
Farm Loan Associations are exempt from all taxation except 
upon their real estate. 

Provision is also made for Joint Stock Land Banks, the capital 
of which must be provided by private parties. They also, may 
issue bonds, but they are not subject to the conditions placed 
upon the Federal Land Banks as to the purposes for which the 
money must be used, as to amortization or as to occupation of 
the land by the owner. 

The banks of both kinds may be designated as depositaries 
of public money and as financial agents of the government. In 
other words they may be employed to sell government bonds. 
The deposits that may be made by the government for the tem- 
porary use of the Land Banks are limited to six million dollars. 

The net effect of the whole scheme is to afford farm loans at 
a moderate rate. All profits accrue to the borrowers and thus 
serve to reduce the rate of interest. Moreover, the expenses of 
the Farm Loan Board are paid by the government and not, as 
in the case of the federal reserve system, by the member banks. 
This, together with the exemption from taxation, operates still 
further to reduce the charge for farm loans. The justification 
for these favors is naturally to be found in the supreme impor- 
tance of a prosperous population of small farmers to the American 
community. The Farm Loan Act thus furnishes a unique ex- 
ample of practical co-operation and of government aid. 



CHAPTER XXXII 

INTERNATIONAL TRADE 
210. References 

J. E. Cairnes, Principles (1874), part 3; C. F. Bastable, Theory of In- 
ternational Trade (1903); G. Clare, The A B C of the Foreign Exchanges 
(1893); A. W. Margraff, International Exchange (1903); W. F. Spalding, 
Foreign Exchange and Foreign Bills (191 5); H. G. Brown, International 
Trade and Foreign Exchange (191 5) ; G. J. Goschen, Theory of the Foreign 
Exchanges (1866); F. Y. Edgeworth, Theory of International Values 
(Econ. Jour., IV, 1893); A. C. Pigou, Protective and Preferential Import 
Duties (1906); R. Giffen, The Use of Export and Import Statistics, in his 
Inquiries (1904); A. C. Whitaker, Foreign Exchange (1919); F. W 
Taussig, Tariff History of the United States (1914), Some Aspects of the 
Tariff Question (1915) and Free Trade, the Tariff and Reciprocity (1910); 
E. Stan wood, American Tariff Controversies in the Nineteenth Century 
(1903); W. J. Ashley, Tariff Problem (1904); L. Porritt, Sixty Years of 
Protection in Canada (1908); H. Withers, Money Changing (1913); 
C. K. Hobson, The Export of Capital (1914). 

211. Basis of International Trade 

It was long supposed that the principles of international 
trade differed from those of internal commerce, in that the 
former was subject to the law of comparative cost and de- 
pendent on the existence of non-competing industrial groups. 
We now know that the law of comparative costs or of recipro- 
cal demand is the explanation of all exchange (§95), and 
that non-competing industrial groups are found in internal in- 
dustry as well (§ 177). Trade takes place between nations 
as between individuals, because of relative, not of absolute, 
advantages. One country A may produce a certain class of 
commodities at a lower cost than B and nevertheless find it 
profitable to import them, because A can produce other com- 
modities still more cheaply than B. It will be advantageous 
for A to export the second class of commodities and to receive 

547 



548 International Trade [§ 211 

pay for them by importing the first. The entire body of eco- 
nomic doctrine elaborated by Ricardo, Mill and Cairnes, tend- 
ing to show that international trade rests on the equation of 
reciprocal demand and comparative cost, has no distinctive 
application to international exchange and therefore calls for 
no special discussion here. 

In only one respect, albeit a most important one, does ex- 
change between nations differ from 'that between individuals. 
In both cases indeed a surplus enjoyment is sought. The 
individual endeavors to obtain this in the form of money, 
because the more money he has the richer he is. The nation, 
however, cannot follow this course. The mere accumulation of 
money is bootless. A nation can do only one of three things 
with its funds, (i) The money may be hoarded. In mod- 
ern times, however, this is not done, because public credit is a 
cheap substitute for government hoards; and because after a 
relatively insignificant point has been reached, a reserve of 
coin, whether for currency or for banking purposes, becomes 
unnecessary or even wasteful. (2) The money may be spent 
at once. If expended abroad, the purchases must come in as 
imports; if spent at home, it diverts to profitable home con- 
sumption what would otherwise have been available for exports. 
In the one case imports are increased, in the other exports 
are lessened. (3) The money may enter general circulation. 
The necessary result of this is to raise the level of domestic 
prices, to check exports and to augment imports, until the 
money flows out again and the international level of prices is 
restored. 

It is for this reason that imports must in the long run pay for 
exports, and vice versa. This does not mean that at any given 
time imports and exports must be equal. The state of recip- 
rocal liabilities between one country and the outside world 
may be such as to lead to a permanent excess of either exports 
or imports. It might be supposed that an excess of imports 
would represent profits on the transaction. One nation A may 



§ 2ii] Basis of Trade 549 

sell its goods abroad at an advantage, and may elect to bring 
in its gains in the shape of additional goods, which would then 
constitute a surplus of imports. Ordinarily, however, the other 
nation B will do the same, so that on the second transaction 
there will be a surplus of exports from A to B. Assuming the 
gains to be equal, these will balance each other. Thus, while 
both parties secure a surplus of satisfaction, there will be no 
excess of exports or imports. 

On the other hand, it must be remembered that goods are ex- 
changed not only for goods, but for services. If a country per- 
forms valuable services for others, they must be remunerated, 
and the payment will ultimately assume the form of extra im- 
ports. England, for example, at the present time does at least 
three things for the rest of the world, (i) The British merchant 
marine is so immense that a large amount of trade between 
other countries is carried on in British bottoms. The freights 
paid by foreigners go to swell British imports. (2) The British 
system of marine insurance is so much more admirably organ- 
ized than that of other countries, that a great part of the ships 
and cargoes of other countries are insured by British firms. 
The profits of this business also increase the volume of im- 
ports. (3) International debts, as we shall see in § 212, are 
liquidated largely by the purchase of bills of exchange on 
London. The commissions to the London bankers again 
reach England in the form of imports. Freights, insurance 
profits, and commissions together amount to a few hundred 
millions of dollars a year. Finally, it must not be forgotten 
that in modern times international transactions take place in 
securities as well as commodities. If a nation has invested 
heavily in foreign bonds, government or industrial, the interest 
on the invested capital will accrue in the shape of imports. 
Another portion of the vast surplus of British imports is as- 
cribable to this fact. 

The so-called favorable balance of trade is for several reasons 
a delusion. It is difficult to state with accuracy the exact rela- 



55° 



International Trade 



[{ 



211 



tion between exports and imports: for (a) where there is a 
long frontier or seacoast, it is wellnigh impossible to include 
everything; (b) even where everything is included, there is no 
assurance against fraud or undervaluation; and (c) there is 
no uniformity as to whether values should be calculated at the 
place of export or of import, that is, whether cost of transpor- 
tation should be included. The statistics themselves are there- 
fore of dubious value. Even if the balance could be accurately 
ascertained, however, it would not tell us anything of impor- 
tance. Some prosperous countries, like England, Germany 
and France, habitually import far more than they export; 
some poor countries, like Peru, Siam and San Domingo, habitu- 
ally export more than they import. The following table will 
show the relation of exports to imports in the principal countries 
of the world: 



THE RELATION OF EXPORTS TO IMPORTS IN 
THE PRINCIPAL COUNTRIES 











Excess of 




Year 


Imports 


Exports 


Exports ( + ) 
or Imports ( — ) 






Dollars. 


Dollars. 


Dollars. 


United Kingdom 


1909 


3,040,127,000 


1,840,415,000 


—1,199,712,000 


Germany . . . 


1909 


2,027,790,000 


1,568,954,000 


—458,836,000 


Netherlands 


1909 


1,261,235,000 


986,810,000 


— 274,425,000 


Italy . . . . 


I 908-9 


600,560,000 


360,310,000 


— 240,250,000 


Belgium . . . 


1909 


714,933,000 


542,277,000 


— 172,656,000 


France . . . 


1909 


1,205,500,000 


1,103,584,000 


— 101,916,000 


Switzerland . ' 


1909 


309,213,000 


211,849,000 


—97,364,000 


United States . 


1909-10 


1,647,554,000 


1,774,824,000 


+ 127,270,000 


Brazil .... 


1909 


179,690,000 


308,332,000 


+ 128,642,000 


British India . 


1908-9 


4T 7,799,000 


486,079,000 


+68,280,000 


Russia . . . 


1908 


470,020,000 


514,099,000 


+44,079,000 


Egypt. . . . 


1909 


109,885,000 


128,895,000 


+ 19,010,000 


Siam .... 


1909-10 


25,663,000 


37,705,000 


+ 12,042,000 


Haiti .... 


1908-9 


5,881,000 


11,008,000 


+5,127,000 


Guatemala . . 


1909 


5,251,000 


10,079,000 


+4,828,000 



EXPORTS AND IMPORTS OF MERCHANDISE, 
UNITED STATES 



Years 
ending 
June 30 



872 
873 
874 
875 
876 

877 
878 
879 
880 
881 
882 
883 
884 
885 



887 



889 
890 
891 
892 
893 
894 
895 
896 

897 



899 
900 
901 
902 

903 
904 

905 
906 
907 
908 
909 
910 
911 
912 

913 
914 

915 
916 
917 
918 
919 
920 



Total Exports 



$444,177,586 
522,479,922 
586,283,040 
513,442,711 
540,384,671 
602,475,220 
694,865,766 
710,439,441 
835,638,658 

902,377,346 
750,542,257 
823,839,402 
740,513,609 

742,189,755 
879,524,830 
716,183,211 

695,954,507 
742,401,37:, 
857,828,684 
884,480,810 
1,030,278,148 

847,665,194 
892,140,572 
807,538,165 
882,606,938 
1,050,993,556 
1,231,482,330 
1,227,023,302 
1,394,483,082 
1,487,755,557 
1,381,719,407 
1,420,141,679 
1,460,868,185 
1,518,561,666 
1,743,864,500 
1,880,851,078 
1,860,773,346 
1,663,011,104 
1,744,984,720 
2,049,320,199 
2,204,322,409 
2,465,884,149 

2,364,579,148 
2,768,589,340 
4,333,482,885 
6,290,048,394 

5,917,714,371 
7,262,282,686 
8,111,039,733 



Imports 



$626,595,077 
642,136,210 
567,406,342 
533,005,436 
460,741,190 
451,323,136 
437,051,532 

445,777,775 
667,954,746 
642,664,628 

724,639,574 
723,180,914 
667,697,693 
577,527,329 
635,436,13^ 
692.319,768 

723,957,114 
745,131,652 
789,310,409 
844,916,196 
827,402,462 
866,400,922 
654,994,622 

731,969,965 
779,724,674 

764,730,412 
616,049,654 
697,148,489 
849,941,184 
822,673,016 
903,320,948 
1,025,719,257 
991,090,978 

1,117,513,071 
1,226,562,446 
1,434,421,425 

1,194,341,192 
1,311,920,224 
1,557,849,988 
1,527,226,105 
1,653,264,934 
1,813,008,234 

1,893,925,657 
1,674,169,740 
2,197,883,510 
2,659,355,185 

2,945,655,403 
3,595,720,018 
5,238,621,668 



Excess of Ex- 
ports over 
Imports 



$18,876,698 



79,643,481 
151,152,084 
257,814,234 
264,661,666 
167,683,912 
259,712,718 

25,902,683 
100,658,488 

72,815,916 
164,662,426 
244,088,694 

23,863,443 



68,518,275 

39,564,614 
202,875,686 



237,145,950 
75,568,200 
102,882,264 
286,263,144 
615,432,676 
529,874,813 

544,541,898 
665,082,541 
478,398,413 
394,422,442 
469,777,267 
401,048,595 
517,302,054 
446,429,653 
666,431,554 
351,090,880 
187,164,732 
522,094,094 
551,057,475 

652,875,915 

470,653,491 

1,094,419,600 

2,135,599,375 
3,630,693,209 
2,974,055,928 
4,136,502,618 
2,872,418,065 



Excess of 

Imports over 

Exports 



;i82,4i7,49i 
119,656,288 



19,562,725 



28,002,607 
2,730,277 



18,735,728 



2Il] 



Basis of Trade 



55^ 



The table and the chart facing pages 550 and 551 will show 
the conditions in the United States for the past few decades. 
Finally, the following table will show the proportion of United 
States exports and imports to and from, the various parts 
of the world exhibiting the changes produced by the Great War: 

PERCENTAGE OF IMPORTS AND EXPORTS FROM 
AND TO GRAND DIVISIONS.^ 





Year ending June 30 


1894 


1900 


1910 


1914 


1917 


Europe : 

Imports 

Exports 

North America: 

Imports 

Exports 

South America: 

Imports 

Exports 

Asia: 

Imports. ...... 

Exports 

Oceania: 

Imports 

Exports 

Africa: 

Imports 

Exports 


45^05 
78.56 

25-49 
13.42 

15-29 

3-72 

10.10 

2.34 

3.28 
1-34 

•53 
•55 


51.84 
74.60 

15-30 
13-45 

11.02 
2.79 

16.45 
4.66 

4.07 
3-11 

1.32 
1-39 


51-76 
65.10 

19.69 
22.09 

12.59 
5-34 

12.45 
3-49 

2.38 
2.92 

I-I3 
1.06 

■ 


47.29 
62.86 

22.57 
22.36 

11.76 

5^27 

15-15 
4.80 

2.22 
3-53 

1. 01 
1. 18 


22.96 
68.75 

28.80 
18.50 

20.38 
4.12 

23.14 
6.05 

2.46 
1.74 

2.26 
.84 



An excess of imports may represent the incurring of liabili- 
ties to other countries which must be met hereafter, or it may, 
on the contrary, represent a liquidation of past or present in- 
debtedness by other countries. In the same way an excess of 
exports may mean that one country is making others its debt- 
ors or, on the contrary, it may be a measure of the amount of 
tribute which that country is paying to others for past or pres- 

1 Report on the Foreign Commerce and Navigation of the U. S., 1904, 
Vol. II, p. 1030, continued in the Statistical Abstract. 



^^2 International Trade [§212 

ent favors in the shape of capital invested or services rendered. 
In itself the so-called balance of trade is irrelevant. 

The error consists in confounding a surplus of exports over 
imports with a surplus of production over consumption. 
A nation, like an individual, ought indeed to produce more than 
it consumes, in the sense that the surplus product or surplus 
energy can be converted into durable capital and thus contin- 
ually augment the command of man over nature. But the 
surplus of production over consumption is a very different 
thing from a surplus of exports over imports. 

212. Rate of International Exchange 

International like domestic transactions are settled in terms 
of money: the machinery for effecting payments differ in 
magnitude, not in principle. A merchant A in France, let us 
say, has imported coffee from M in Brazil, while B in France 
has exported the same value of silks to N in Brazil. Instead 
of A sending money to M, and N sending it back to B, it is 
far simpler for A and B to settle with each other in Paris, and 
M and N in Rio de Janeiro. B accordingly writes an order, 
known as a bill of exchange, to N directing him to pay M, or, 
in technical language, B draws on N; A buys this bill from B 
and remits (i. e. sends) it to M, who presents it to N and gets 
it cashed. Thus no money is exported and only one bill is 
drawn. Inasmuch as it is not always easy for the M's and N's 
to find each other in Rio de Janeiro, and the A's and B's in 
Paris, the business of issuing and purchasing such bills has 
become the function of the banker and the bill broker. More- 
over, since these bills can be transferred by indorsement, they 
are available for payment not only between France and Brazil, 
but between any other countries that have dealings with either 
one. This explains the so-called "three-cornered" exchange, 
where country A imports from B and pays by drafts on C, 
which has imported from A. Finally, since it is necessary 
to make out only one transferable order, bills are generally 



§212] Rate of Exchange 553 

drawn on that country which possesses the larger financial 
centre. In fact, the great mass of bills, especially in the case 
of exchanges between less important countries, are to-day drawn 
on London in pounds sterling. This is due chiefly to the im- 
mense volume of British trade, to the stability of the British 
currency, and to the fact that the seller of a bill on London 
can almost invariably count upon finding a buyer on advanta- 
geous terms. . 

Where the reciprocal liabilities of two countries are precisely 
equal, that is, where the payments to be made exactly balance 
each other, excliange is said to be at par. This means that the 
amount of bullion paid for a bill in one country is the exact 
equivalent of the value of the bullion received in the other coun- 
try. The fine gold in a pound sterling, for instance, is equal to 
the fine gold in $4.86|; hence the par of exchange between 
England and the United States is $4.86f. It is obvious that 
deviations from the par are due to changes in the condition of 
reciprocal liabilities, which, owing to the continual oscilla- 
tions of the market, are never for any length of time precisely 
equal. On some days or seasons there will be a balance in 
one direction and the demand from would-be purchasers of 
bills exceeds the supply. At other times the supply of bills 
offered for sale will exceed the demand. According to these 
fluctuations bills become dear or cheap, and exchange will 
be above or below par. The meaning of the phrase "a rise 
or fall in the rate of exchange" depends on whether, in quot- 
ing the par, the base line is the domestic or the foreign unit. 
Thus in London the par of exchange with some countries 
is quoted in pence; with others in the currency of those coun- 
tries, like francs or marks. In the United States the par is 
generally quoted in dollars, so that when exchange is said to 
rise it means that purchasers of bills must pay more dollars 
because there is a greater demand for remittances to settle 
obligations abroad. The limits within which the rate of ex- 
change can deviate in either direction from par are called the 



r^4 International Trade [§212 

''gold points," that is, the points beyond which it becomes profit- 
able to export or to import gold in settlement of the balance. 
It is only in exceptional instances, as in the case of a very 
stringent money market when dealers are ready to sell bills at 
a sacrifice or when there is a short-lived difficulty in a gold- 
producing country converting its bullion into coin, or in a 
war crisis like that of 19 14, that it is possible for exchange to 
fall below the specie point, or to rise above it. 

When the exchanges are not calculated on a gold basis, the 
deviations are such that we cannot properly speak of a par at 
all. If a gold standard country trades with a silver standard 
country, the par itself fluctuates with the daily change in the 
gold price of silver. The same is true of a depreciated paper 
currency, where a new limit to the rise in the price of bills is 
fixed by the premium on gold. 

In the United States, foreign bills are known as documentary 
and finance bills. Documentary bills are those drawn against 
the export of commodities, payable at sight or on the expira- 
tion of three, ten, thirty, sixty or ninety days. They have 
attached to them as security the bill of lading, insurance cer- 
tificates, shippers' invoices, and occasionally other documents 
like consular certificates, certificates of origin or government 
inspection certificates. Finance bills are those drawn by 
American bankers on their European correspondents. They 
are often covered by collateral security in the shape of stocks 
or bonds listed on the New York stock exchange. The ordi- 
nary causes of an over-supply of "foreign bills" are: (i) large 
exports of cotton, wheat and corn, especially from August to 
November of each year; (2) heavy purchases of American 
securities by European houses; (3) high interest rates in New 
York. In the latter case American bankers find it profitable to 
issue sixty or ninety day "bills on London and "sell sterHng," 
loaning the proceeds on Wall Street. If the interest rate in 
New York is six per cent and the discount rate in London 
three per cent, there will be a profit over and above the com- 



§212] Rate of Exchange 555 

missions of the drawees and the British stamp taxes. In order 
to eliminate the risk of having to pay a higher price for the 
sterhng draft required when the loan matures, they buy at 
once a foreign exchange "future" or demand draft for future 
delivery. These foreign exchange ''futures" perform the 
same function as the wheat and cotton futures described in 

§ 154- 

Since the rate of exchange depends on reciprocal liabilities, 
anything that affects temporary indebtedness causes the rate to 
fluctuate. If we were to strike a balance sheet in the foreign 
trade of any country, we should have to put on the credit side 
not only the exports of commodities, but such items as freights, 
commissions, brokerages, the excess of insurance premiums over 
payments, loans from a foreign country, interest on loans to a 
foreign country, profits on capital invested abroad, the amount 
drawn on letters of credit belonging to travellers from abroad, 
the sums brought in by immigrants, sales of securities, and the 
gains made on arbitrage operations. All these items act on 
the rate of exchange precisely as do exports; that is, they tend 
to diminish the demand for bills or to reduce the rate of exchange, 
and they require additional imports to restore the equilibrium. 
So on the debit side we must put not only the imports, but 
the purchases of securities, the loans to a foreign country, the 
interest on loans from abroad, letters of credit issued to travellers 
going abroad and the like. These tend to increase the demand 
for bills and to raise the rate. 

Gold will therefore be exported or imported only when it 
is necessary to restore the equation of international indebted- 
ness. This equation or equilibrium, however, as has just been 
explained, is not between exports and imports but between 
credits and liabilities. The equilibrium is attained when the 
credits balance the liabilities, and may be perfectly compatible 
with an excess of either imports or exports. Unless there are 
special causes arising out of some defects in the currency 
system itself, as, for instance, during the period of the silver 



^^6 International Trade [§213 

agitation in the United States, especially from 1894 to 1896 
gold will be exported when the liabilities for a time exceed 
the credits, but not necessarily when the imports exceed the 
exports. The permanent international distribution of the 
precious metals is therefore dependent on the conditions of 
international trade in the broadest sense. Thus we reach 
from another point of view the conclusion reached above 
(chap, xxviii), that no country on a sound currency basis can 
permanently have more or less money than it needs. 

213. Growth of Free Trade 

By free trade is mean nowadays the freedom of international 
trade from interference by government restriction or prohibi- 
tion. Originally, however, the demand for freedom of trade 
applied as well to internal commerce. In classic Rome the 
portoria comprised all classes of taxes on transportation. In 
mediaeval Europe town was shut off against town and province 
against province by burdensome tolls and interdictions, and 
at every point on the land and water highways large sums 
were exacted, just as strangers who to-day traverse the region 
of some mid-African potentate are required to pay exorbitant 
passage fees. The origin of interference with trade is thus 
to be sought in the double reason, — the primeval assump- 
tion, of which there are still so many survivals, that strangers 
are synonymous with enemies, and the opportunity of securing 
a simple and abundant revenue. With the growing recognition 
of the mutual advantages of an unimpeded traffic, and with the 
discovery of other equally good sources of income, these relics 
of a more primitive economic life gradually disappeared. In 
the United States the results of the commercial jealousy among 
the states that had just won their independence were so disas- 
trous that the new constitution of 1789 made it impossible 
for any commonwealth to interfere with interstate commerce. 
Freedom of internal trade is now assured in the whole civilized 
world, subject only to necessary police regulations. 



§ 213] Growth of Free Trade 557 

Even in the sense of international commerce, however, free 
trade signifies at present something quite different from what 
it denoted in former centuries. In the middle ages the liberty 
of exporting commodities was often restricted to especially se- 
lected individuals or companies or limited to certain localities, 
as in the case of the Staple ^ towns in England and her conti- 
nental possessions. The cry for free trade which arose in 
seventeenth-century England involved the demand for free- 
dom of export in the sense of freedom from monopolist com- 
panies or favored towns (§ 50). It was advanced by the very 
individuals who were clamoring for protection through high 
duties on imports. Free trade in the modern sense of free 
imports was a later conception. 

The mediaeval impediments to international trade apart from 
those just mentioned consisted of taxes and prohibitions. In 
the opening centuries of the middle ages they were applied 
primarily to exports, and even after "free trade" in the earlier 
sense had been attained the customs^ duties of the European 
countries still consisted to a large extent of taxes on exports. 
It was free trade because the duties applied to all individuals 
alike, and because the goods might be shipped anywhere after 

1 The word staple is derived from the German stapeln, " to heap up," 
and was applied to certain commodities which were stored in large quan- 
tities in the Steel-yard {i.e. the Staple yard, *' Stapelhof ") which the 
flansa towns maintained in London. The list of st'^,ple articles which 
at first comprised chiefly wool, woolfells, tin, and leather, was gradually 
increased until the number of staple articles at present is considerable. 

2 The term " customs tariff " has a bizarre origin. The English 
kings were forced to rely for their revenue, apart from the crown lands, 
to a very large extent on the export and import duties. These became 
the customary revenue, until finally Parliament granted various rates 
known as the Great Customs and the Little Customs. The second part 
of the modern term was formerly said to be derived from the town of 
Tarifa on the Mediterranean near the Straits of Gibraltar, where the 
Barbary pirates held the straits and exacted a graduated scale of pas- 
sage money from all vessels. More recent etymologists, however, now 
trace it to the Arabic " ta'rlf," or inventory. 



558 International Trade [§213 

payment of the tax. A pronounced increase of import duties, 
however, was effected by the rise of the Mercantile system in 
the seventeenth century. With the awakening of the national 
spirit and the desire to foster domestic industry, restrictions 
were imposed on the importation of any foreign commodities 
that might interfere with home production. The system of 
protection was not new, but it was now applied on a national 
scale. In those countries which possessed colonies, like Por- 
tugal, Spain, the Low Countries, France and England, it be- 
came known as the Colonial system, and only later acquired 
the name of the Protective or Mercantile system. It consisted 
of several or of all of the following factors: 

(i) Bounties on the raising or export of raw materials in 
the colonies; (2) limitation to the mother countries of the 
export of certain enumerated commodities from the colonies; 
(3) prohibition of colonial production of manufactured arti- 
cles; (4) high protective or even prohibitory duties on im- 
ports of manufactures from abroad; (5) restriction of the 
carrying trade between the colonies and the mother country 
to vessels of the latter. In the case of food the policy of agri- 
cultural protection fluctuated between bounties on exports and 
high duties on imports. 

It was in England that the system was carried to an extreme, 
and it was there that the reaction first came. During the period 
of the industrial revolution, which, as we know, began in Eng- 
land several decades earlier than elsewhere. Great Britain pur- 
sued a poHcy of the most rigorous industrial protection. Not 
only were many of the import duties quite prohibitory, but the 
export of machinery or even of the plans of machinery was 
absolutely forbidden. Compared with the British tariffs of the 
end of the eighteenth and the beginning of the nineteenth cen- 
tury, even the most complex of modern tariffs is simplicity itself. 
When Great Britain had finally attained a virtual monopoly of 
the chief industries and had estabhshed her supremacy on the 
ocean, she naturally found it to her interest to let down the bars. 



§ 213] Growth of Free Trade 559 

Not fearing foreign competition any longer at home, her great 
need was to secure an outlet for her surplus products. More- 
over, the transition from the agricultural economy to the factory 
system had converted her from an exporter to an importer of 
. food. The industrial interests experienced no serious oppo- 
sition to the policy of relaxing the barrier of import duties on 
manufactures. But when they sought to secure cheaper mate- 
rials and food by abolishing the agricultural duties, they met 
with a stout resistance from the landed interests. The victory 
of the Anti- Corn-Law-League in the forties was the final tri- 
umph of the industrial over the agricultural interests. Free 
trade was now an accomplished fact. 

For a short time the free trade movement made some head- 
way in other European countries, although in several it was 
subordinate to the wider scheme of removing the remnants of 
mediaeval shackles on internal trade and industry in general. 
With the revival of the national sentiment, however, first in 
Germany and Italy and then elsewhere, the last quarter of 
the nineteenth century witnessed not only a return to, but an 
intensification of, protection. Finally, as the younger indus- 
trial nations are attaining their maturity. Great Britain is com- 
mencing to lose her proud position of complete industrial 
domination, and we accordingly find since the beginning of 
the twentieth century in the classic home of free trade itself a 
sharply defined movement for a return to protection. 

In the United States the system of protection on a national 
scale began with the threatened dangers to the industries that 
had been called into existence by the war of 1812. From that 
day to this, the protective policy has been followed, interrupted 
only for the few decades during which the non-industrial South 
was in the political saddle. With the downfall of slavery there 
began an era of far more stringent protection which has con- 
tinued with slight oscillations to the present. 

The chief dates in the tariff history of the United States are 
as follows: 1789, first tarff with a few small protective duties, 



560 International Trade [§ 214 

and a general level of five per cent on the non-protected com- 
modities; 1 81 6, first general protective tariff, with rates of 
thirty per cent and over on certain textiles; 1824, moderate 
increases; 1828, the "Tariff of Abominations," with higher 
rates and duties on raw materials; 1 833-1 841, the Com- 
promise Tariff, with gradual reductions; 1842, slight changes, 
but a comparatively low level; 1846, the .Free Trade Tariff, 
with ad valorem revenue duties; 1857, a still lower revenue 
tariff; 1861, 1862 and 1864, War Tariffs, with incidental pro- 
tection; 1871, ten per cent reduction; 1875, restoration to 
the old level; 1883, slight changes; 1890, McKinley Tariff, 
higher rates; 1894, Wilson Tariff, considerable reductions; 
1897, Dingley Tariff, higher rates; 1909, slight reductions; 
1913, now in force, much lower rates. 

Free trade, therefore, as a world policy is far from being 
assured. In fact the tendency of recent years is on the whole 
away from the more liberal movement. It is accordingly neces- 
sary to consider the arguments somewhat more closely. 

214. The Argument for Protection 

The reasons that have been usually advanced in favor of pro- 
tection may be reduced to five heads. 

(i) The "balance of trade" argument claims that it is 
necessary to restrict imports in order to secure a surplus of 
exports and thus to increase the wealth of the country by aug- 
menting the stock of the precious metals brought in through 
this favorable balance of trade. The fallacy of this old Mer- 
cantilist contention is obvious, {a) In the first place, exports, 
as we have seen, must in the long run pay for imports, and 
it is impossible to increase the surplus of exports simply by 
diminishing imports, {h) Secondly, coin is not imported when 
exports exceed imports, but when credits exceed liabilities, 
(c) Thirdly, wealth does not consist of money, but of money's 
worth, and after a certain point has been reached the impor- 
tation of coin defeats its own object. So defective indeed 



§214] Argument for Protection 561 

is this argument that it is no longer advanced by serious 
students. 

(2) The "home market" argument played a great role in 
the earlier political controversies of the United States and in a 
slightly modified shape formed the basis of Carey's defence of 
protection. It is founded on the behef that protection is bene- 
ficial to agriculture as well as to industry, because the resulting 
increase of population and wealth will afford a larger market 
for the food and raw material of the immediate neighborhood. 
Moreover, the existence of industrial centres will enable the 
farmers to devote attention to the more perishable products to 
which transportation to a distance would be injurious or fatal, 
and will thus lead to more intensive and diversified farming. 
Finally, the development of the home market, it is said, will 
obviate the costly expense of transportation to distant countries 
and will thus increase the wealth of society in general. This 
argument has now been weakened, partly because the revolu- 
tion in the methods of transportation has materially lessened 
the importance of distance as a factor in cost, partly because 
the agricultural and mineral output of the United States has so 
vastly transcended the limits of domestic consumption that the 
prosperity of large sections depends upon securing an outlet 
for the surplus. It is the foreign market, not the home market, 
which has for several decades loomed large in the imagination 
of the farmer. 

(3) More important of recent years is the "wages" argu- 
ment. In the United States this takes the form of ascribing 
to the protective system the chief efficacy in maintaining high 
wages. It declares that unless the tariff rates are elevated 
enough at least to compensate for the difference between the 
domestic and the foreign standard of wages, the former will 
drop to the level of the latter. To this the free trader is accus- 
tomed to rejoin as follows: (a) The argument as advanced by 
the manufacturers is insincere, because they are interested not 
in high wages but in large profits, (b) There must be a gross 



562 International Trade [§214 

fallacy in the argument, because it assumes precisely the oppo- 
site form in countries where wages are low. Germany demands 
protection against England and Russia against Germany, on 
the ground that their low-priced laborers need to be protected 
against their more skilful and higher class competitors. In 
some countries protection is demanded because wages are high; 
in other countries, because wages are low. If the Russian 
argument is good, the American argument must be bad, and 
vice versa. 

From the point of view of economic principle the following 
considerations may be advanced. In the first place, we must 
not forget the distinction between high wages and high cost. 
Other things being equal, higher wages indeed connote higher 
cost; but, as we learned above (§ 125), there may be an econ- 
omy in high wages. If high wages are an evidence of high 
productive efficiency and go hand in hand with improved 
machinery or superior natural advantages, high wages may 
mean low cost. It is precisely in those occupations where 
wages are highest in comparison with abroad, as in the produc- 
tion of boots, bicycles, cottons and wheat, that America is able 
to export successfully, showing that in these occupations at 
least high wages are no obstacle to cheap production. While, 
however, this consideration undeniably impairs the general 
argument, it does not successfully meet the point that there are 
other industries which would not be able to withstand foreign 
competition at home if the present wage schedule were main- 
tained concurrently with a withdrawal of protection. On the 
other hand, this proves only that these particular industries 
would not exist; it does not prove that there would be any 
reduction in the rate of wages in the other industries which 
would continue or which might be newly started. Whether 
wages would fall would, so far as this point is concerned, de- 
pend upon the possibility of profitably employing in the old 
and permanent as well as in the newly started occupations 
the capital and labor hitherto utilized in the now abandoned 



§ 214] Argument for Protection 563 

industries. To the extent that this might not be possible there 
would indeed be a tendency for wages to fall, because of the 
diminished productivity of labor. It is clearly inadmissible, 
however, to argue that this must necessarily be the case. 

This J^eads to the consideration that the direct influence of 
protection on wages has been exaggerated. The rate of wages 
depends, as we know (§ 174), upon the location of the margin 
of productivity. Where natural resources are abundant, wages 
will be high with or without protection^ The difference be- 
Tween American and European wages was no less striking before 
the policy of protection was inaugurated in the United States 
than it is at present. In point of fact, protection was then 
demanded on the ground that American wages were high, and 
no one thought of ascribing the existing high wages to a non- 
^exTsfing protection. In the same way, wages in England have 
exceeded those in Germany alike during the periods of pro- 
tection and free trade. Moreover, a large part of industry in 
every country, as the railways, the building trades and the like, 
is' necessarily local and not exposed to foreign competition, 
^ages in these occupations are hence not directly affected by 
any policy of foreign trade. It is only to the extent that pro- 
tection has an influence in relocating the margin of the pro- 
ductivity of labor in general by affecting the accumulation of 
capital and the efficiency of labor that it can exert any influence 
on wages. But this can be accomplished only if the protected 
industries actually involve the most profitable utilization of labor 
and capital. The wages argument in this form, however, dif- 
fers considerably from the common and crude formulation, and 
in reality fuses into the arguments to be mentioned below. In 
its crude form the wages argument is not convincing. Pro- 
tection explains the high wages in America as little as the low 
*wages in Russia. Low wages are found under protection; high 
wages under free trade. 

(4) The "infant industry" argument is the one which for 
a long time enjoyed the principal reputation, especially because 



^64 International Trade [§ 214 

Mill in his general defence of free trade made in this case an 
important concession. Although in its theoretic formulation 
usually ascribed to Friedrich List, it is found substantially in 
Alexander Hamilton's celebrated Report on Manufactures 
in the last decade of the eighteenth century, and more fully in 
the work of Daniel Raymond with which List had become ac- 
quainted during his sojourn in America. The theory asserts that 
just as children need the fostering care of their parents during 
the period of infancy, so the feeble and newly started industries 
need to be carefully protected during their years of weakness. 
It is conceded that this involves an expense, but it is claimed 
that it must not be considered an economic loss any more than 
the expense of raising a family is in the true sense a loss; for 
both will more than pay for themselves when they reach matu- 
rity. In the case of industries this result will be brought about 
by the competition between the domestic enterprises, which 
will ultimately reduce the prices of the commodities to a point 
lower than that of the foreign wares with the cost of transpor- 
tation added. 

List formulated the theory a Httle differently. According to 
him production involves not only the turning out of definite 
commodities, but the creation at present of the possibility of 
turning out more commodities hereafter. The real economic 
function of society is not simply to produce goods but to 
produce productive forces. Through protection, government 
achieves this educational end and thus trains the nation to 
industrial efficiency. National strength and power are the 
keynote of List's programme, just as national industrial inde- 
pendence was the objective of Hamilton and Raymond. List's 
work, The National System of Political Economy, bears the 
motto, Et la patrie et Vhumanite, — "my country as well as 
the world." The policy of government must therefore change 
with economic conditions. In the purely agricultural stage 
when a country, like the United States in the eighteenth cen- 
tury, is not yet ripe for industrial advance, protection would 



§ 214] Argument for Protection 565 

be folly; in the fully developed industrial stage, as in England 
during the nineteenth century, protection would be equally 
inane; but in the transition stage, as in the United States and 
Germany at present, protection is as necessary as it will ulti- 
mately be profitable. 

It will be recognized that List's argument differs from that 
of Carey and the home market theorists in two respects: it 
does not involve agricultural protection and it is confessedly 
temporary in character. With the iapse of every decade and 
the growth of the infant industries into lusty manhood the 
argument becomes continually weaker, and protection becomes 
less defensible as a permanent policy. This has led to the final 
and most recent argument. 

(s) The "variegated production" argument, as it might be 
called, accepts the one point in the Hamilton-List theory, 
but discards the other. It emphasizes the idea of national 
industrial independence, but maintains that the chief deside- 
ratum is a well-rounded economic development, with a due 
consideration for all the various national interests. In a 
country like Germany, for instance, where the foreign com- 
petition of virgin lands would mean the ruin of domestic agri- 
culture, the increased cost of food and raw material, it is 
claimed, would be a cheap price to pay for the preservation 
of a healthy and prosperous farming class. On the other hand, 
a variegated industry is undoubtedly a sign of progress, and to 
the extent that it denotes a more efficient utilization of labor 
and capital and a help to enterprise, it will result in higher 
wages as well as greater profits, a better standard of life for 
the workman and a more prosperous condition for the manu- 
facturer. Even if domestic prices are higher than those of 
foreign goods, the loss to the individuals as consumers is more 
than offset by the gain that accrues to them as producers and 
as participants in the general prosperity. Thus protection is 
demanded as a permanent policy. 



566 International Trade [§ 215 

215. The Argument for Free Trade 

To these arguments the free traders make rejoinders in 
detail, all of them based on an afhrmative position which, as 
elaborated by Adam Smith and the Physiocrats, is simplicity 
itself. International trade is like internal trade: the freer it 
is, the greater are the advantages to both parties. The idea 
that what one man or one country gains in trade the other 
loses is a fallacy scarcely less baleful than the idea that any 
one can get rich by impoverishing his customers. For in for- 
eign trade the other country is not so much a rival as a cus- 
tomer; if by restricting imports we exclude their wares, by 
diminishing exports we necessarily prevent them from buying 
our wares. By allowing trade to be absolutely unfettered, every 
one is able to buy in the cheapest and to sell in the dearest 
market, and the gains of all will be at a maximum. Every 
nation will thus be in a position to develop its natural advan- 
tages to the utmost, and the world's wealth will be enhanced 
because of the distribution of productive energies in the most 
economical fashion. Just as free trade among the separate 
commonwealths of the United States results in the most effi- 
cient utilization of economic forces, so free trade among the 
nations of the world will bring about the greatest development 
of wealth. Anything that obstructs this free trade is a step 
backward. 

According to this argument, protection is injurious in sev- 
eral ways, (i) It involves an unnecessary tax on the con- 
sumer, because it increases prices by the amount of the tariff. 
Protection is thus a robbery of the many for the benefit of the 
few. It is class legislation, and for that reason alone repre- 
hensible. (2) It means a maladjustment of economic forces. 
Like all other government interference, it savors of paternalism 
or socialism. (3) Protection does not really protect, because 
it destroys as many industries as it artificially fosters. Well- 
nigh every commodity is a raw material for some other com- 



§ 2i6] Conclusion c;67 

modity. A high duty on iron interferes with the iron industry;' 
a high duty on iron products interferes with the machines 
constructed of such products; a high duty on machines in- 
terferes with industries that use the machines. If protective 
duties were aboHshed, it is indeed possible that some indus- 
tries would disappear, but it is more than likely that other 
industries, now handicapped by high duties on the manufac- 
tures which constitute their raw material, would flourish. A 
tariff, therefore, means a dislocation, rather than a protection, 
of industry in general. (4) Protection involves political cor- 
ruption on a gigantic scale. One has but to witness the scenes 
in and about the committee room when a new tariff is being 
framed in the United States to realize that there exists no 
more potent engine of political demoralization. Section is 
pitted against section, interest against interest, business against 
business, and the final result is due to log-rolling and a series 
of "unholy alliances." (5) Protection is responsible for the 
persistence of national animosities, while retaliatory tariffs and 
commercial wars are often a prelude to the actual clash of 
arms. Free trade means peace and good- will; protection 
leads logically to international hatred and bloodshed. The 
one implies the reign of humanity and brotherhood, the other 
of particularism and enmity. The one spells progress; the 
other, retrogression. 

216. Conclusion 

If now we attempt impartially to weigh these contending 
arguments, several points at once force themselves upon our 
attention. In the first place, some of the positions occupied 
by extremists on both sides are untenable. The protectionists 
err, as we have seen, in emphasizing the balance-of-trade ar- 
gument, the home-market argument or the wages argument, 
at least in its crude form. The free traders err in claiming 
that protection is simply class legislation or socialism, or that 
it is responsible for national animosity. 



^68 International Trade [§ 216 

(i) As to class legislation, protection is supported in the 
United States by factory owners, laborers, and farmers alike. 
Some sections and some enterprises, indeed, may derive more 
benefit than others, but that is the inevitable result of almost 
all legislation. That in certain countries and in special cases 
indefensible preferences inimical to the common welfare shel- 
ter themselves under the aegis of a protective tariff cannot be 
used as an indictment of the system in general. Everywhere 
we must distinguish between use and abuse. Where popular 
government and constitutional safeguards exist, legislation in 
behalf of a particular class is not likely permanently to endure 
unless the community identifies the interests of that class 
with its own. (2) Again, to affirm that protection is pater- 
nalism or socialism is simply to call names, and to make the 
unwarranted assumption that the ideal of government is laissez 
Jaire. (3) Finally, to assert that protection is the cause of 
national animosity is clearly to put the cart before the horse. 

Abandoning these far from impregnable positions, there still 
remains an element of weakness in the arguments of both sides. 
Even the more moderate advocates of protection are apt to 
overrate its importance. The efficacy of protection, even at 
the best, is not unUmited. No degree of protection can make 
cotton growing permanently successful in Maine, or put the 
silk industry on a stable foundation in the desert of Arizona or 
the lumber district of Michigan. Protection must work within 
the limits of general economic advantages. Unless the artifi- 
cial environment can be created at a comparatively small cost, 
it is economically not worth creating. But what is done at 
even a small cost artificially will often come of itself after a 
time naturally, and sooner or later the permanence of the in- 
dustry must rest on these natural foundations. Just as the 
cotton mills which do an export business, and are therefore 
independent of protection, are now springing up in the South, 
so various industries are gradually creeping farther West with- 
out any protection against the long-estabhshed enterprises in 



§ 2i6] Conclusion ^69 

the East. Before the foundation of the Austrahan common- 
wealth New South Wales and Victoria pursued opposite poli- 
cies in foreign trade, and yet their industrial development was 
approximately the same. Even if there had never been any 
protection in the United States, the time would undoubtedly 
have come when the mere accumulation of wealth and the 
growth of population would have superinduced the develop- 
ment of industry. 

On the other hand, the free traders fail to make allowance 
for an important element in the problem. The essence of free 
trade is cosmopolitanism; the essence of protection is nation- 
alism. Free trade holds up to our contemplation the ultimate 
economic ideal, but fails adequately to reckon with actual 
forces. The universal republic is far in the distance, and the 
separate nations still have an important function to subserve in 
developing their own individuality and thus contributing dis- 
tinctive elements to the common whole. Legitimate compe- 
tition presupposes, as we have seen (§ 63), a relative equality 
of conditions; as long as the growing nations of the world are 
in a state of economic inequality, we must expect and not en- 
tirely disapprove the effort on the part of each to attain 
equality by hastening its own development. Ultimately, no 
doubt, patriotism wUl be as much of an evil as particularism 
has now become; but in the present stage of human progress 
patriotism is a virtue. Free traders often overlook the sound 
kernel in what seems to be the apple of discord. 

As long as nations continue to form the economic units it 
is not competent to argue from internal free trade to interna- 
tional free trade. The cotton mills in the South may injure 
their competitors in New England, but the nation will look 
on with equanimity, because it means a surplus production 
of wealth within the country. When, however, an industry 
in one country is menaced by the competition of another, it 
is no solace to the first that the world's wealth is being aug- 
mented at the cost of its own. 



570 International Trade [§ 216 

In the main, then, the conclusion would seem to be that 
under certain conditions a protective policy is relatively defen- 
sible. It may be conceded that in countries the mass of whose 
exports are of an industrial character protection is unwise. It 
may be taken for granted that when nations reach a state of 
comparative economic equality, protection will be unnecessary 
and even injurious, because if let alone each will then develop 
its own natural advantages. It cannot be gainsaid that protec- 
tion sets loose the selfish passions of individuals and classes 
and that it is responsible for its share of political greed and 
unsavory legislation. But when the economic resources of a 
country are not yet fully developed, it may none the less te 
desirable to accelerate the pace, in the interests of its own 
immediate national progress, with the idea that the contributions 
of fully mature and economically well-rounded nations to the 
common wealth of the globe will in the long run exceed the 
gain from an uneven and one-sided evolution. 

So far as the United States is concerned it is scarcely open to 
question that the system of protection has somewhat hastened 
the industrial development of the country. It has not created 
this development, which was bound to come sooner or later, 
and it is responsible for many incidental evils. It has con- 
tributed to political demoralization; it has sheltered under its 
wing incompetent individuals who would have been eliminated 
to the common advantage by free competition; it is maintained 
in several industries where it is no longer needed; and it has 
done its share in creating monopoly conditions in other indus- 
tries. And yet it is difficult to escape the conclusion that pro- 
tection has been on the whole a wise policy for the United States. 
Without it, it would probably have taken us somewhat longer 
to come to our own; without it the immense amounts of capital 
invested by foreigners in starting industries on this side of the 
tariff wall would have been employed at home, to that extent 
retarding the diversification of American industry and the in- 
fluences that contribute to the increased efficiency of labor; 



§ 2i6] Conclusion 571 

without it the United States would not have entered so soon 
on its role as a world power; without it, in short, the whole 
tempo of economic progress would have been slower. To those 
who deplore the feverish haste of modern life, this will serve 
as an additional objection to protection. To those, however, 
who desire to face industrial facts as they exist, and who realize 
that in the intense national rivalry of to-day, to stand still is 
to retrograde, the efforts of the statesmen who have guided the 
policy of the United States almost from the beginning will not 
seem to be such a tissue of errors or such a chain of mistaken 
aspirations as they are sometimes represented. As the United 
States becomes more and more of an industrial nation, seeking 
an outlet for its manufactures, it is indeed probable that the 
tariff will be gradually lowered, with advantage to all; but he 
would be a hasty prophet who would predict any sudden or 
material change for a considerable time to come. 



CHAPTER XXXIII 
TRANSPORTATION 

217. References 

A. T. Hadley, Railroad Transportation (1885); B. H. Meyer, Railway 
Legislation in the United States (1903); H. R. Meyer, Government Regu- 
lation of Railway Rates (1905); E. R. Johnson, American Railway Trans- 
portation (1910); E. R. Johnson and G. S. Huebner, Railroad Traffic and 
Rates (2 vols., 191 1); C. S. Raper, Railway Transportation (191 2); W. 
M. Acworth, The Elements of Railway Economics (1905); D. Knoop, 
Outlines of Railway Economics (1914); W. Z. Ripley, Railroads, (2 vols., 
191 2-15) and (ed.) Railway Problems (n.d. 1913); F. N. Judson, The Law 
of Interstate Commerce and its Federal Regulation (new ed., 191 2); L. J. 
McPherson, The Working of the Railroads (1907) and Railroad Freight 
Rates (1909); Cleveland and Powell, Railroad Promotion and Capitali- 
zation (1909); J. M. Clark, Standards of Reasonableness in Local Freight 
Discriminations (1909); M. B. Hammond, Raihvay Rate Theories of 
the Interstate Commerce Commission (191 1) ; Report of the Railroad Securi- 
ties Commission (191 2); S. O. Dunn, The American Transportation Ques- 
tion (191 2) and Government Ownership of Raihvay s (1913) ; A. M. Sakolski, 
American Railroad Economics (1913); M. Wymond, Railroad Valuation 
and Rates (1916); H. G. Brown, Transportation Rates and their Regula- 
tion (19 1 6). 

218. Transmission of Intelligence — The Post-Ofiice 

Transportation as an economic factor includes the transmis- 
sion of intelligence as well as the transportation of persons and 
commodities. The deeper influence of the modern media of 
transportation in overcoming the element of distance has been 
adverted to above (§ 19). The purpose of this chapter is to 
discuss some of the specific problems connected with actual 
charges. 

The chief media of the geographical transmission of intelli- 
gence are the post-ofiice, the telegraph and the telephone. 
Postal service in classic antiquity was almost exclusively for 

572 



§ 2i8] Transmission of Intelligence 573 

governmental purposes. In the middle ages it was largely a 
private enterprise carried on to serve the interests of the mer- 
chants, as in the Hanseatic towns, or in the case of the students 
living far from home at the Universities. It was not until the 
seventeenth century that a regular postal service was inaugu- 
rated in Europe. Mail coaches were first used by Pitt in 1784, 
and the modern postal system was introduced by Rowland 
Hill's reform in 1840. The four points of the reform were 
uniformity of rate, penny postage, prepayment and the use of 
stamps. Up to that time adhesive stamps were virtually un- 
known, prepayment of postage was deemej^ a discourtesy, and 
rates were graduated according to distance in conformity with 
the so-called zone system. In England the charge for a single 
thin sheet varied from 4J. for 15 miles to i2d. for 300 miles. 
A letter weighing two ounces from London to Cork cost gs. 
I id. — about eighty times the present rate. In America up 
to 1845 the rates were analogous — 6 cents to 25 cents per 
single sheet for distances from 30 to 400 miles. Hill concluded 
that the chief cost was ascribable to the handling of the mails 
at both ends, and the suggestion of uniformity carried the other 
schemes of improvement with it. By 1857 the reform was ac- 
complished in the United States, and in 1874 the international 
post was inaugurated. The use of universal postage stamps 
has, however, not yet been found practicable, owing to the 
diversity in the currency systems. 

The post-office business is not confined to (i) the trans- 
portation of letters. In most countries it includes: (2) the 
parcels post, (3) the passenger post, (4) postal money orders, 
(5) postal collection of bills, (6) postal savings banks, (7) pos- 
tal telegraph and (8) postal telephone. In the United States 
all these additional functions, except the fourth, the sixth 
and in part the second, are in private hands. But notwith- 
standing the restricted scope of the American post, the factors 
of national wealth, popular intelligence and immense distances 
have combined to make the postal transactions of the United 



574 Transportation [§ 218 

States by far the most important, not only absolutely, but rela- 
tively to population. The revenues for 19 13 were over 
$266,000,000, wiping out the old and considerable deficit due 
partly to the growing demands for rural free delivery, and 
partly to the misuse by book publishers of the low rates on 
periodicals. 

Postal charges are sometimes based upon the principle of 
joint cost (§ 107). In reality, however, the controlling principle, 
as we shall see in the analogous case of railway charges (§ 221), 
may better be described as the principle of value of service. 
Letters pay more than merchandise, merchandise more than 
books, books more than newspapers. Were the rates primarily 
based on cost, they would be inverted, for it obviously costs 
more to transport a newspaper than a light letter. The higher 
letter rate is imposed on the principle that the letters can 
better afford to make a substantial contribution to this end 
than the newspapers. The receipt of the letter is worth 
more to the average correspondent than the receipt of the 
newspaper to the average subscriber. It is the value, not 
the cost, of the service, which is the controlling factor. Cost of 
service enters only as a minor ingredient, for letter rates in- 
crease with weight, speed and risk, as well as in the case of 
excess postage, special delivery and registered mails. 

The same holds good in a modified way of telegraph and 
telephone charges. Newspaper telegraph rates are lower than 
ordinary rates; business telephone rates higher than residential 
rates. In only one important respect is there a difference. 
The telegraph, telephone, and parcels post charges in America 
are stiU calculated according to the zone system, long since 
abandoned in the letter post. This is due chiefly to the fact 
that the distance element in cost is greater in the former than 
in the latter, but in part also to the fact that the former are still 
conducted on the principle of maximum profits rather than of 
the greatest social utility. The question of government owner- 
ship will be discussed later (§ 233). 



§219] Railway Development 575 

219. Railway Development 

Of the modern media of transportation the railway is the 
one that presents the most difficulties. Canals, which devel- 
oped in England and America at the end of the eighteenth and 
the beginning of the nineteenth century, have lost their origi- 
nal function as the chief artificial medium of transportation, 
and are now of importance only in exceptional cases like the 
Erie and the Panama canals; or where, as in some of the 
European countries, they are links between rivers or between 
the rivers and the sea. 

When Solomon de Cause first advanced the idea of employ- 
ing steam as a propelling power in 1615, he was shut up in the 
mad-house as a hopeless maniac. Two centuries later, in 
1812, when Colonel Stevens of Hoboken proposed to build a 
steam railway at far less cost than the projected Erie Canal, 
he was regarded as absurdly visionary and somewhat demented. 
And yet to-day, almost within the short space of a human life, 
we have a vast network of over half a million miles of iron 
roads encircling the civilized world, considerably over one- 
third of which are found in the United States. The table on 
page 576 shows the railroad mileage of the world by countries 
on Jan. i, 1913. 

In the United States the railway mileage was 23 in 1830; 
2,818 in 1840; 9,021 in 1850; 30,626 in i860, and 52,922 in 
1870. By 1916 the mileage was almost 270,000, and the capital 
invested about twenty-one billions. 

In Europe the railways were built to accommodate exist- 
ing traffic; in America they were constructed, for the most 
part, to create new traffic. In Europe the railway was the 
result of civilization, in America an outpost or harbinger of 
civilization, — a difference which has led to three important 
results : 

(i) The cost of railways in America is far lower than in 
Europe. In a new country the right of way is inexpensive, the 



S7^ 



Transportation 



[§219 



terminals acquire value largely as a result of the railway itself. 
Moreover the exigencies of business do not necessitate the 
solidity of construction that is required in older communities. 



RAILWAY MILEAGE IN EVEN THOUSANDS IN 1915 



Europe. 

Germany . . . , 
Russia (in Europe) 

France 

Austria-Hungary 
Great Britain and 
Ireland . . . . 

Italy 

Spain 

Asia. 
Russia (in Asia) 

India 

Japan 

China 



41 


,000 


37 


000 


32 


000 


30 


000 


24 


000 


II 


000 


10,000 


II 


000 


35 


000 


8 


000 


7 


000 



North America 
United States . 
Canada . . . 
Mexico .... 

South America. 
Argentina . . 
Brazil .... 

Summary. 
North America 
Europe .... 

Asia 

South America. 
Australasia . . 
Africa .... 

Total . . . 



267,000 
32,000 
16,000 



21,000 
16,000 



324,000 
218,000 
72,000 
49,000 
23,000 
27,000 

713,000 



These conditions are reflected in the following table of average 
cost of railways per mile, as of 1 911: 



England . . 
France . . . 
Belgium . . 
Germany . . 
United States 



^65,000 
137,000 
177,000 
109,000 
60,000 



(2) The desire of the new communities to secure additional 
facilities led to the adoption in the United States of the com- 
petitive method in building railways, whereas in Europe it was 
recognized from the outset, or soon realized, that one railway 
between two points could in many cases perform as efficient 
service as two or three. What occurred at an early date in 
Europe is in process of accomplishment in the United States. 



§ 2 2o] Nature of Railway Business ^"jj 

The American railways are being rapidly consolidated into 
large groups, each of them serving a particular section. In 
the table facing page 578 will be found the details of this 
process as it had developed in 191 2, with the existence of six 
groups of over 15,000 miles in length, and of four groups of 
20,000 to 30,000 miles. 

(3) In the United States the existence of keen competition, 
of rapid improvements in facilities, and above all of the growth 
of the long-distance traffic conspired to bring about a re- 
markable progressive reduction in freight rates during the last 
three decades of the nineteenth century. The facts are rep- 
resented on the chart following page 580. But it must be re- 
membered that the earnings have nevertheless increased faster 
than the mileage. By 1900, however, this reduction reached its 
limit, and since that time there has been a slight advance. 

220. Nature of Railway Business 

The railway business possesses three distinctive character- 
istics: it is more than a mere private undertaking; it tends in- 
evitably to become a monopoly; and, as in all large enterprises 
where the proportion of fixed capital is relatively great, there is 
a somewhat peculiar relation of constant to variable expenses. 

(i) When investors put their money into a railway, they 
are in a sense its owners. But a railway is not like a shoe 
factory. The state grants to a railway corporation some of its 
own sovereign powers, as the right of expropriation of private 
property; it regards the railway as its agent, and in return 
insists upon a large measure of responsibility to the public. 
Even the private railway, therefore, is a quasi-public institution. 

Railway rates and fares may hence be regarded from two 
different standpoints. In so far as a railway is a business cor- 
poration, it is a private matter: it may construct its tariff in 
accordance with general business principles; it will endeavor 
to subserve primarily the interests of its owners. It will strive 
for the greatest possible profits; and this course is legitimate 
37 



^y8 Transportation [§ 220 

and praiseworthy. But in so far as the railway forms the 
public highway, it is a public matter: the objective point now 
is the general welfare; it aims not at the greatest possible 
profits, but at the greatest possible benefits; it looks not at 
the interests of its owners, but at the interests of the public. 
The one point of view is individual, the other is social. The 
modern railway corporation shares both these characteristics: 
its nature is hybrid. To subordinate the public to the private 
element is plainly inadmissible. Entirely to engulf the private 
in the public element is equally unfair, so long as the railway 
is not owned by the state. In the United States two princi- 
ples, at all events, have been firmly established during the last 
generation. The one is that the railway is more than a mere 
private business; the other is that the capital invested by 
private individuals in railway enterprises does not lose its 
claim to a just remuneration or to equal protection before 
the law because of the fact that the railway is a quasi-public 
institution. 1 

(2) The railway tends sooner or later to become a mo- 
nopoly. So far as the local traffic is concerned, this is true 
from the outset. The chief consideration here is the possibility 
of increasing production without proportionate increase of plant 
or capital. The traffic on a railroad may be doubled without 
the necessity of duplicating roadbed, track, terminals and 
general expenses. Several lines paralleling each other at every 
point would not benefit the public and would certainly ruin 
each other. But even in long-distance traffic much the same 
is true. The theory of the beneficence of competition depends 
on the postulate of the transferability of capital. In case of 
failure the unsuccessful competitor deserts the enterprise, but 
the railway, once started, has come to stay; it may change 
hands, but it will not, and in many states it cannot, be aban- 

1 These leading cases were the Granger Cases (Munn v. Illinois), 
94 U. S. 113 (1876), and the Nebraska Rate Cases (Smith v. Ames), 
169 U. S. 466 (1898). 



RAILWAY CONSOLIDATION, 1916 



Vanderbilt Group : ^ 

New York Central Lines . 
Chicago and Northwestern 



Miles Miles 

Northern Pacific 7,104 

12,815 Chicago, Burlington and Quincy 9,366 

8,107 Colorado and Southern .... 1,871 



Union Pacific Group: 

Illinois Central 4,769 

Union Pacific System .... 7,826 

Georgia Central 1,924 

San Pedro, Los Angeles and Salt 

Lake 1,010 

Chicago and Alton 1,025 

Morgan Group: 

Southern Railway 7,ii7 

Southern Railway ( f of 615 

miles) _ . 307 

Chic, Indianapolis and Louis- 
ville 621 

Mobile and Ohio 1,122 

Queen and Crescent 926 

Reading Company (incl. New 

Jersey Central, 633) ^ . . . 2,218 

Erie 2,443 

Chicago Great Western . . . . 2,115 

Small Southern Lines .... 1,000 



Pennsylvania Group: 

Pennsylvania System 12,102 

Norfolk and Western 2,043 

Western N.Y. and Pennsylvania 668 

Long Island 399 



Canadian Pacific: 

Parts of Main Line in the U.S. 
about 1,500 

Minneapolis, St. Paul and Sault 

Ste. Marie (Soo Line) . . . 3,021 

Wisconsin Central 1,059 

Duluth, South Shore and At- 
lantic 



627 



Gould Group: 

Texas and Pacific i,994 

St. Louis Southwestern .... 1,754 
Denver and Rio Grande, incl. 
Rio Grande Western' and 
Western Pacific 3,564 

Hill Group: 

Great Northern 8,122 



Walters Group: 

Louisville and Nashivlle .... 

Nashville, Chattanooga and St. 
Louis 

Atlantic Coast Line, incl. Plant 
System 

Georgia Railroad (A. C. L. & 
L. N. N., lessees) 

Chicago, Indianapolis and Louis- 
ville (i of 615) 

Independent Systems: 

Chesapeake.and Ohio 

Delaware and Hudson .... 

Chicago, Milwaukee and St. 

Pauls 

Atchison, Topeka and Santa Fe 

Seaboard Air Line 

Frisco System 

Missouri, Kansas and Texas . . 

Southern Pacific System * . . . 

Rock Island 

Missouri Pacific 

Wabash .• • • 

Minneapolis and St. Louis _ . . 

Baltimore and Ohio System, incl. 
Cincinnati, Hamilton and 
Dayton 

Lehigh Valley ^ 

N. Y., New Haven and Hart- 
ford 

Boston and Maine 



Summary: 

Vanderbilt Group . 
Union Pacific Group 
Morgan Group . . . 
Pennsylvania Group 
Canadian Pacific . . 
Gould Group . . . 
Hill Group .... 
Walters Group . . 
Independent Systems 



about 



5,306 

1,230 

5,039 

346 

307 



2,371 
909 

10,075 
11,136 
3,123 
5,253 
3,165 
10,587 
8,330 
7,293 
2,516 
1,550 



5,474 
1,442 

2,065 
2,302 



2 1, GOO 
17,000 
18,000 
15,000 
6,000 
7,000 
26,500 
12,500 
77,000 



Total 
Small Roads 




Aggregate mileage 



267,000 



1 A small interest in the Vanderbilt Group is owned by the Union Pacific. 

2 Some of the stock of the Reading is owned by the Lake Sh9re and Michigan. 

3 A small interest in the St. Paul is owned by the Union Pacific. 

4 Pennsylvania Railroad has a considerable interest in the Southern Pacific, 
s Friendly to Morgan Group. 



§ 22o] Nature of Railway Business 579 

doned. A bankrupt individual may be disregarded as a com- 
petitor; a bankrupt railway is a more dangerous competitor 
than before, because the receiver need not earn anything to 
pay interest or dividends. There is hence every inducement 
for the railways to prevent competition; and the attempts will 
vary from more or less loose agreements to complete consoli- 
dation. As Gladstone said at the time of the EngUsh discus- 
sion in 1844: competition between railways is like a lovers' 
quarrel: breves inimicitiae, amicitiae sempiternae. Moreover, 
this tendency cannot be permanently arrested by legislation. 
We may prohibit railway combinations, but we cannot prevent 
them. If we make them illegal, we simply make them secret, 
or cause them to change their form. 

The public again profits in some respects no less than the 
railways. The curse of free building of American railways has 
been the system of parallel and often needless lines. An addi- 
tional road between two, terminal points frequently represents 
so much wasted capital, and the necessity of earning profits on 
this swollen capital aggravates the burden on the public. 
Competition between railways is supposed to be responsible 
for the facilities and low charges of American railways: in 
point of fact its influence has been much exaggerated. The 
competition, while it lasts, is of a desperate character, and each 
line strains itself to the utmost to secure the business that is 
often sufficient only for one. Charges may indeed be lowered 
temporarily, but the strenuous effort to secure traffic gave birth 
to the very worst abuses of railway management, — secret per- 
sonal discriminations and immoderate local discriminations. 
The changes were violent, the conditions unstable. Reduction 
of rates was sometimes carried to such a point that not even 
operating expenses were met. The railway wars, which were 
the logical and extreme manifestation of railway competition, 
exhausted the companies and afforded but a dubious relief to 
the public. Lowness of charge was outweighed by instability of 
charge. The reduction itself was, moreover, of an ephemeral 



580 Transportation [§220 

character. Continuance of low rates meant universal railway- 
bankruptcy; escape from ruin was possible only through com- 
bination. If competition was beneficial to the public, it was a 
temporary benefit; if railway wars, on the other hand, threw 
trade into confusion and engendered the most aggravated 
abuses, the cessation of competition was a boon to the public. 
As was pointed out in § 63, competition in ordinary business 
is the "life of trade," but competition in railways might be 
called the death of trade, or at all events the death of honest 
and impartial treatment of traders. 

(3) Railway outlays are divided into fixed charges or inter- 
est, and operating expenses. While the proportion which fixed 
charges bear to total expenses varies with each line, it may be 
said roughly that it is usually from forty to fifty per cent. In 
other words, well-nigh half the expenses are constant or inva- 
riable. They do not change with the amount of business 
transacted. , 

The operating expenses are divided into (a) maintenance 
of way and stations, (b) maintenance of equipment, (c) con- 
ducting of transportation and (d) general expenses, such as 
ofiice, law and insurance expenses. Of these (c) and, to a 
smaller extent, (b) fluctuate almost in proportion to business 
transacted; but (a) and still more (d) will change only very 
slightly with the trafiic. The proportion of each of these four 
classes to the whole will vary with the widely different charac- 
teristics of each line; but it may be safely affirmed that in 
general about one-half of the operating expenses are constant 
or invariable. 

The total constant expenditures of a railway are thus the 
fixed charges plus one-half the operating expenses. In other 
words, a large majority of railway expenses are irrespective of 
the amount of business. They remain the same, notwithstand- 
ing the increase or decrease of the traffic. The effect of this 
state of things on the determination of actual rates will be seen 
in § 222. 









































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§ 22i] Principle of Railway Charges 581 

221. Principle of Railway Charges 

Whether the railway be owned by the state or by a private 
corporation, there must, up to a certain point at least, be a 
similarity in the principle of charge. For the interests involved 
are so enormous, and the particular benefits to the patrons so 
separable, that no country has yet proposed to run its railways 
free or below cost. Some states like Prussia make large profits 
out of their government railways; others as in Australia en- 
deavor just to cover the cost; but none has attempted to make 
up a railway deficit by taxation. 

The principle sometimes advanced as an ideal is that of cost 
of service. A fair criterion in ordinary commodities is cost of 
production; why, it is asked, should it not be applied to rail- 
way transportation? 

(i) Obviously, however, this cannot mean the cost of the 
particular service. In the first place, such cost is impossible of 
ascertainment. There is a wide disparity in the cost of car- 
riage on the same line according to the changing conditions 
under which the service is performed. At one time the greater 
portion of the freight may be carried over the whole line; at 
another the local business may outweigh the through traffic, so 
that the capacity of the rolling stock is not fully utilized. At 
one time the traffic may move in great part in one direction 
and the number of "empties" returned may be abnormally 
large; at another time there may be far more back-loading 
and a more even distribution of traffic. At one time the trains 
may be started with full loads; at another, they may be half 
filled. The proportion of paying freight to dead weight, or 
the amount of the fare, is of considerable importance. So that, 
even if it were feasible to construct a tariff based on the cost 
of service of each particular transaction, it would be of no avail 
unless the amount of freight remained an unalterable quantity. 

(2) Secondly, if rates were based on cost of service, most 
of the work performed by the railways would come to a stand- 



582 Transportation [§221 

still. It costs immensely more to transport a given value of 
heavy goods like coal than an equal value of silk. If rates 
were fixed according to cost of carriage, the expense of con- 
veyance would so vastly exceed the prime cost of the coal as 
effectually to bar its use except in the immediate neighborhood 
of the mines. In the same way it costs so much more to bring 
wheat from North Dakota to New York than from Troy to New 
York, that unless a lower ton-mile rate was granted on the North 
Dakota business, there would be no market for it at all in New 
York. Individual cost of service can hence not possibly be a 
criterion of railway charges. 

(3) If therefore anything is meant by cost, it must be joint 
cost. As we have seen, however, in our general discussion of 
value, joint cost refers only to the cost of all the services in the 
aggregate, and affords no criterion as to the principle govern- 
\/ ing the separate services. To ascertain this we must revert to 

an anterior law of value, namely, the law of marginal utility. 
In other words, the principle of charges is not the cost of the 
individual service, but the value of the individual service. 

The object of a railway is to increase its traffic and to de- 
crease its expenses. This it finds can be best attained by lower- 
ing the charges on certain classes of goods, or on the same 
classes to different localities. But this is equivalent to saying 
that what influences the manager is not the cost, but the value, 
of the service. This practice in railway parlance is called 
"charging what the traffic will bear," — an unfortunate ex- 
pression, and liable to much misconception. If we mean by 
the principle "charging what the traffic is able to bear," it is 
correct; but if we mean "charging what the traffic can be 
made to bear," it is incorrect. Charging what the traffic will 
bear, rightly understood, simply serves as an excuse for re- 
ducing rates on low-class traffic because it cannot bear higher 
rates. The phrase is a bad one, because it may be twisted 
into meaning that the greatest possible charges on high-class 
goods are also legitimate. Correctly interpreted, it justifies 



§ 22i] Principle of Railway Charges 583 

lower charges on certain kinds of business; incorrectly inter- 
preted, it seems to justify extortionate charges on other kinds 
of business. 

The attempt to make the theory of joint cost the funda- 
mental explanation of railway rates, is, moreover, erroneous for 
another reason. Prices are fixed at the point of cost of pro- 
duction or joint cost, as we know, only when the products are 
competitive products. There is always a marginal producer 
who sells at cost price without any profit. But in monopolies 
there is no marginal producer, and, as we have seen (§ no), 
the relation of price to cost is far more indirect. Price may 
be continually above cost, the difference being the monopoly 
profits. Price in such cases is fixed according to the principle 
of monopoly maximum returns, which is nothing but charging 
what the consumer can afford to pay. The charges on each 
monopoly by-product will be put at the highest price consist- 
ent with greatest sales or profits, and not necessarily propor- 
tionate to cost of production. As we have learned in the last 
paragraph, however, a railroad is in the long run a monopoly. 
Railway charges, therefore, are fixed not by any principle of 
cost, but by the principle of monopoly profits, that is, char- 
ging what the traffic will bear. 

This also explains the analogy that is frequently drawn be- 
tween railway charges and taxation, with the idea of ability or 
capacity to pay. Taxation is compulsory, but payment for a 
monopoly of a necessity of life (like railroad charges in the 
present stage of business activity) is in one sense equally com- 
pulsory. The principle of charging what the traffic will bear, 
in any monopoly, has reference to the ability of the patron to 
pay. The monopolist is indeed not moved by ethical consid- 
erations, but the price that he charges depends upon what the 
purchaser can afford to pay. Justice in taxation requires that 
a man shall pay in some proportion to what he can afford; the 
fixing of monopoly price depends on what he thinks he can 
afford: at bottom, there is a real analogy between the cases. 



584 Transportation [§222 

Some object to the value of service principle as the ex- 
planation of railway rates, because they hold that value means 
intrinsic utility and grain and coal would then be charged 
more than silks and spices. This is to revert to the old fallacy 
that value and utility are identical. The slightest acquaintance 
with the modern theory of value suffices to dispel this objec- 
tion. When we say that railway rates are fixed by value of 
service, we mean that the marginal utility of the service is 
definitely estimated by the shipper; that if the rate exceeds 
this estimate, the commodity will not be sent; and that a 
different estimate may be put on each shipment or commodity. 
The marginal utility of the service fixes the prices of all com- 
modities; but it is only in the case of competitive production 
that this is equivalent to joint cost. Thus the theory of joint 
cost, in so far as it is true at all, is a subordinate part of a 
more general rule; and to the extent that the railroad is a monop- 
oly, the theory becomes less and less true. The dispute will 
easily be avoided as soon as it is recognized that cost of service 
or joint cost is simply a variation of value of service, and that 
the theory of marginal utility (which is nothing but value of 
service) is the fundamental explanation not only of railroad 
charges but of all prices. 

222. Classification 

Charging according to what the service is worth results in 
the two fundamental principles of classification and discrimi- 
nation. Classification is due to the fact that the same service 
has a varying value when rendered to different commodities. 
Discrimination {i. e. local discrimination) is due to the fact 
that the same service has a varying value when rendered to 
different places. Whether the same service has a varying 
value for the freight of different persons, and may thus give 
rise to personal discrimination, is a question to be treated by 
itself. 

Value of service influences classification in a double way, — 



§222] Classification 585 

it puts the same articles into different classes, it puts different 
articles into different classes. The first method is illustrated 
by the distinction between freight and express traffic. In the 
United States the general classification applies only to freight 
traffic. In the rest of the world, where separate express com- 
panies are unknown, the rates are classified according to this 
distinction, as in England, where they are known as goods and 
parcels rates. In the same way passenger fares on express 
trains are often higher than on ordinary trains. 

Far more important, however, is the classification of different 
articles into different categories. Cost of service indeed in- 
fluences classification to a minor extent in so far as the articles 
differ in bulk, shape, risk, direction, or regularity of shipment, 
or as passengers use a Pullman or a plain coach. Actual rates, 
however, are mainly influenced not by cost of service, but by 
what the service is worth. The main point is the development 
of the traffic. We must keep in mind the distinction drawn in 
§220 between the constant and the variable expenses. If the 
freight or the cheap passenger business, like immigrant traffic, 
can be secured at rates which will more than cover the variable 
expenses, — the actual hauling and a proportionate part of the 
station expenses, — it will pay the road to take this business, 
because a contribution, however small, is thereby made to fixed 
expenses. These would have to be met at all events. A small 
contribution to constant expenses is better than none at all. 
Yet to apply this low rate to all business would ruin the 
company. 

Classification again benefits the public. The meagre surplus . 
over hauling expenses on the cheap goods contributes, if ever 
so little, to the fixed expenses, and diminishes to this extent 
the amount which it is necessary to raise from the remaining 
traffic. If we had no classification, not only would we not 
have cheap meat and cheap wheat, but the charges on the dear 
goods would be higher. It reduces the rates on the cheap 
goods immensely and the rates on the dear goods moderately. 



586 Transportation [§222 

The principle of classification is the first corollary from the 
distinction between constant and variable expenditures. 

To uphold the legitimacy and necessity of classification is, 
however, quite another thing from attempting to palliate unde- 
niable abuses. Classification plays only a very slight role in 
passenger trafiic because, especially in democratic countries, 
one man is considered as good as another; but the freight 
classifications, most of which have grown up in a hap-hazard 
way, are full of inconsistencies. There are two problems in 
freight classification, — to secure uniformity between different 
railways and to secure uniformity between shippers. 

(i) At the outset every road had its own classification. 
With the growth of consolidation and agreements classifica- 
tions applicable to connecting and competing roads were 
elaborated. In a small country like Italy it has been found 
possible to construct a uniform tariff for the entire country. 
In the United States the difficulties arising from the conflicting 
interests of different sections have been found insuperable. 
The South demands a specially low rate on cotton, the West 
on wheat, the Pacific slope on fruit, and so on. There are 
now four chief classifications, — the official (in the North and 
East), the Southern, the Western, and the Transcontinental 
classifications. Cotton piece goods, for instance, are in class 
one in the Western, in class three in the official, and in class 
five in the Southern classifications. What the railroads, how- 
ever, are not able to accomplish by mutual agreement will 
probably be effected in no distant future by legislation.^ If 
this is done, however, the greatest care will have to be taken, 
when prescribing a national classification, to provide for an 
adequate number of special or commodity rates outside of the 
regular classes. 

(2) The American classifications, although far superior to 

1 A histoiy of the attempts to secure a national classification will 
be found in Inlevstate Commerce Commission Reports, second, fourth, 
and eleventh and thirty-second reports. 



§ 223] Discrimination 587 

those of a few decades ago, are still often lacking in uniformity, 
in stability and in justice. If the railway is a quasi-public in- 
stitution, these wide powers of fixing the classes cannot be put 
in the hands of private individuals or corporations as sole arbi- 
ters. To imply with many of our eloquent railway officials that 
there is an identity of interests between the railway and the 
shippers is unfortunately not borne out by experience. To 
demand, on the other hand, a rigid law prescribing all details 
would impute to our legislators a knowledge which they cannot 
possess. To cure the abuses of classification by Congress 
designating administrative agents who, under the spoils system, 
shall fix the classification, would be a jump from the frying pan 
into the fire. An escape from the dilemma seems to be outlined 
in the principle of advisory boards or consultative councils, 
which have been established in Germany, Italy and Japan. 
These councils represent the commercial interests, and the 
classification finally adopted is the result of a conference, and 
often a compromise, between the shippers and the railways. 

223. Discrimination 

As opposed to classification a discrimination may be defined 
as an inequality in the charge for hauling a like quantity of 
similar articles or individuals for an equal distance in the same 
manner. All discrimination is either personal or local. 

While differences in rates based on classification are in a 
sense legitimate, it is impossible to find any principle on which 
to base personal discriminations. Personal discriminations in 
passenger fares take the form of free passes; personal discrim- 
inations in freight rates occur in a multiplicity of ways. They 
are beyond doubt the most flagitious abuses of arbitrary railway 
management. 

Allowance for quantity or making a lower charge for larger 
shipments is indeed, within certain limits, defensible. It is then, 
however, really a matter of classification, and may be upheld in 
the same way as the distinction between slow freight and ex- 



588 Transportation [§223 

press business. The difficulty, however, is to select the unit 
above which the rates shall be the same to all. Shall it be the 
pound, hundredweight, ton, car load, cargo lot, or train load? 
Usually the car load is taken as the dividing line, and as such 
does not excite much dissatisfaction, although even this may 
sometimes work injustice to the small shipper and cause inde- 
fensible preferences. 

But if this comparatively unimportant difference be only 
partially justifiable, the vastly greater discriminations which 
cannot even claim cost of service as an ostensible reason are 
indefensible on any theory whatever. To build up one man's 
business at the expense of another's can never be acknowledged 
a legitimate function of common carriers. The railroad ad- 
vocates at one time asserted that a business firm makes wholesale 
rates less than retail rates and gives special figures to different 
customers. Why is not the same principle applicable, they 
asked, to the railroad business? They utterly failed to perceive 
that the railroad is not simply a private business, but a public 
trust; that a merchant is not bound to treat his customers 
equally, but that a railroad exercises public functions, is invested 
with public rights and therefore has public duties. The whole- 
sale principle or allowance for quantity, when carried to this 
extreme, becomes utterly untenable. 

Personal discriminations, then, cannot be upheld on any 
theory. To attempt to abolish them by relying on free compe- 
tition as a remedy is absurd. Cut rates and rebates were never 
so common as during railway wars. The great mass of personal 
discriminations were due not to the volition of the railway 
managers, but to the stress of competition and the desire to 
attract business. The Interstate Commerce Law, which in one 
section attempts to maintain competition by prohibiting rail- 
way pools and in another section forbids personal discrimina- 
tion, is endeavoring to secure two diametrically opposite ends. 
If we strengthen competition, we inevitably increase personal 
discrimination. It is not so much the Elkins law of 1903, impos- 



§ 223] Discrimination 589 

ing severe penalties, as the spread of combination among the 
railways which is responsible for the recent gradual disappear- 
ance of personal discrimination. 

Local discrimination may arise in two ways, (i) The road 
may desire to extend its traffic in commodities coming from a 
distance. If they are to be carried at all, they must be trans- 
ported at less than regular rates. Hence arises the necessity 
of a distinction between local and through traffic. Goods 
coming from a distance must be treated in the same manner 
as cheap goods. Local discrimination is like classification. 
The distant freight is the cheap freight, the near freight is the 
dear freight. Local discrimination of this kind is in principle 
legitimate. The long-distance traffic, by making a contribution 
to constant expenses, reduces the local rate as well. It is the 
immense long-distance traffic in the United States which has 
enabled the American railways to reduce their charges, local 
as well as through, far below the European level. The abolition 
of local discriminations of this kind would level up, not level 
down. 

(2) Local discriminations may arise from competition at 
the junction points. The competition may be due to cheaper 
water transportation, to a foreign railway or to a better equipped 
or shorter domestic railway. A lower rate to the competitive 
centre is the sole condition of the retention of the competitive 
traffic. 

It is sometimes stated that local discriminations are in prin- 
ciple reprehensible because they remove geographical advan- 
tages; and it is claimed that the true principle is that of the 
equal mileage rate. This argument, however, is not convincing. 
There is no such thing as an inviolable geographical advantage. 
There are no vested rights in situation. One town may be 
connected with the coast only by a turnpike; another farther 
distant may have the good fortune to see a railway built 
through its limits. Has the former any cause to complain 
because it is robbed of the benefits of its hitherto advantageous 



590 Transportation [§223 

situation? The object of all improved means of communica- 
tion is, in fact, to annihilate distance, to minimize differences 
in situation. Maintenance of original geographical advantages 
would render impossible all but local business in the vast mass 
of commodities; it would again turn our Western fields into 
barren wastes. Differential rates widen the field of supply; 
they increase the specialization of wants and create the possi- 
bility of satisfying these wants, so characteristic of modern 
society. Opposition to local discriminations arises from view- 
ing solely the interests of the producer; rational economics leads 
us to consider also the consumer. Opposition to differential 
rates is bas,ed on the supposed welfare of a particular class or 
section of producers; a wise national economy will ponder 
over the interests of the whole community, irrespective of sec- 
tional jealousies. If local discriminations are so arranged that 
distant producers are enabled to compete with local producers, 
the latter may indeed see their profits curtailed, but the former 
will see their profits increased, and the consuming public as a 
whole will evidently gain. 

This does not, however, justify all differential rates. The 
abuses have often been outrageous, the methods undeserving 
of palliation. Local interests have been disregarded, and the 
discriminations so conducted as to ruin whole businesses or 
towns in order to build up others. It is not necessary to as- 
cribe illicit motives to the railway managers. They have often 
been forced into unjust discrimination by the stress of compe- 
tition and the instinct of self-preservation. But railway officials 
commit a great mistake in calling all local discriminations just, 
because they are the effect of competition, precisely as the 
demagogues err in opposing undeniably valid discriminations 
and at the same time upholding competition. Competition is 
made to cover a multitude of sins. Railway profits and public 
'interests do not always go hand in hand. The possible diversity 
of interests renders some form of governmental supervision 
imperative. 



§223] Discrimination 591 

It is indeed true that, in the main, rates should increase 
with distance or mileage. Some extremists propose to apply- 
to railways the postal principle of making a uniform charge 
irrespective of distance. This, however, completely overlooks 
the fact that in the post the chief item of cost is the handling 
at each end and that the expense of transportation itself is an 
insignificant fraction of the whole; while in the railway, on 
the other hand, a far greater part of the cost, especially in 
longer distances, is the mere hauling expense. To disregard 
distance would require such an immensely high average rate 
as to make even wagon transportation cheaper for short 
stretches. The postal principle is utterly impracticable as 
well as theoretically erroneous. 

But while cost increases with distance, it does not increase 
proportionately to distance, precisely because of the relation 
of constant to variable expenses. Hence distance rates do 
not imply, as some demand, equal mileage rates. Both the 
cost and the value of the service increase less rapidly than the 
distance. Even in the relatively simple passenger business 
mileage rates are used only for comparatively short distances; 
the fares to the more distant competitive centres are almost 
always less than mileage rates. As soon, however, as we have 
any derogation from the principle of equal mileage, we have a 
local discrimination. 

The simplest limitation on the practice of local discrimi- 
nations is the enactment of the short-haul principle. This 
prescribes that the charge to any intermediate point shall not 
exceed the aggregate charge to the final point. Although 
there is no vested interest in geographical situation, it be- 
comes an anomaly to charge to a way station the rate to a 
competing point further on, plus the additional rate from 
the competing point back to the way station. This is an 
inversion of the principle of distance. The attempt, however, 
to enforce such a hard and fast rule is perilous. As long as 
the law cannot be applied to waterways and to foreign com- 



592 Transportation [§ 223 

peting railways as well, the anomalies cannot be entirely re- 
moved. Unless the railways from the East to San Francisco 
met the all-sea rates, or the Canadian rates to the coast, they 
would lose their through transcontinental traffic, and would 
have to raise their intermediate rates as well. While therefore 
the Interstate Commerce Law accepts the short-haul principle, 
it permits the commission to make exceptions; and among 
the nicest duties imposed on the commission is that of deter- 
mining when an exception is legitimate. 

But if even this comparatively simple matter requires such 
delicate handling, what shall be said of the great mass of other 
discriminations, where the charge to an intermediate station is 
relatively, without being absolutely, greater than the charge to 
a more distant point? Among the perplexing problems that 
arise are the following: Is it legitimate to make export or im- 
port rates less than domestic rates, that is, to charge less be- 
tween the two points for the same commodities when the haul 
is only a part of the distance to a foreign country? Is it rea- 
sonable to make group or blanket rates, that is, to put all 
stations within a radius of a few tens or even hundreds of miles 
in a group and make the same charge to all? Is it just to make 
allowance for "milling in transit" or "floating cotton," that 
is, to allow grain to go from the fields to the mill, or cotton 
from the plantation to the compresses, or logs from the forest 
to the saw-mill, and then to proceed to the point of destina- 
tion on its proportion of a through rate rather than the local 
rate? Is it defensible to follow the "basing point" system, 
whereby local rates are based according to the relative dis- 
tance of the local points from the competitive points, the rate 
being ascertained in each case by adding to the through rate 
to the basing point the local rate from that point back to the 
local point? Is it permissible to make differentials between 
cities — as, for instance, on grain, flour, and provisions, where 
the domestic rates from the West to New York are two cents a 
hundredweight higher than to Philadelphia, three cents higher 



§ 224] Railway Regulation ^93 

than to Baltimore and two cents lower than to Boston, with 
different figures for ex-lake grain (grain from the West which 
leaves Buffalo after storage, on a new and independent rate) 
and still different figures for export rates? 

These are only a few of the embarrassing questions which 
call for decision. Three points are, however, obvious: (i) No 
hard and fast rule can be laid down. All the circumstances 
and conditions must be taken into consideration, and these 
may change from day to day or season to season. (2) It is 
not only a question of railway practice, but of business and 
local rivalry. (3) The final decision of such delicate and im- 
portant matters must not be left to the shippers or the railways, 
but must be intrusted to some higher authority, which should be 
not only expert in the transportation business, but completely 
impartial as between the railways and the shippers, on the one 
hand, and the rival sectional interests on the other. 

224. Railway Regulation 

The preceding discussion has made it clear that some form 
of railway regulation is necessary. There are five different 
methods of dealing with railways, (i) The government may 
own and manage the railways, as in Prussia, Italy, Switzerland 
and Australasia. (2) The government may own the railways, 
but leave the operation in private hands, as in some of the 
roads in North Carolina and all the roads in some minor 
European countries. (3) The railways may be owned by 
private companies, but operated by the government, as until 
1905 in Italy. (4) There may be mixed ownership and opera- 
tion, either with the idea that the competition of the state 
railways will regulate the private companies, as formerly in 
Belgium, or without any such intention, as at present in Russia, 
France, India and many other countries. (5) The railways 
may be left to private ownership and management, as in Eng- 
land and the United States. 

The general discussion of government ownership or manage- 
38 



594 Transportation [§ 224 

ment, and the special reasons against it in the United States, 
may be left to a later chapter. Points one to three may there- 
fore be omitted. On the fourth point the experience of Belgium 
has conclusively proven that a government railway is not an 
effective regulator of private companies, and that instead of 
the government railway drawing the private companies up to 
its level, the government railways, on the contrary, are invari- 
ably pulled down by the stress of competition to the level of 
the private companies, with personal discrimination and ille- 
gitimate preferences of all kinds. This leaves as the practical 
problem in Great Britain and the United States point five, 
or the governmental supervision of railways which remain in 
private hands. 

In Great Britain, where the situation is much simpler be- 
cause of the smallness of the country and the extended sea- 
coast, competition was eliminated at an early date, and personal 
discriminations have been correspondingly rare. The chief 
questions have been those of relative rates between localities 
and maximum rates on different classes. After several more 
or less feeble attempts at regulation a railway commission 
was instituted in 1873, with judicial powers. Their findings 
as to facts are final; as to law, they are reviewable by a higher 
court. In 1888 a law was enacted giving the Board of Trade 
power to suggest maximum rates, and during the years 1891-94 
Parliament accepted the recommendation and enacted maxi- 
mum rates. Finally, in 1894 it was provided that no railway 
should increase its existing rates within the maximum without 
affirmatively proving to the satisfaction of the Railway Com- 
mission that the increase was justifiable. It has been claimed 
that this provision has seriously interfered with the progressive 
reduction of rates which would naturally come through the 
increase of business; for the freedom to reduce a rate, and the 
lack of freedom to restore it if found to be unprofitable, will 
prevent even the most venturesome railway manager from 
making a hazardous experiment. 



§ 224] Railway Regulation 595 

In the United States the early attempts at regulation were 
confined to the separate states. It was not until 1887 that 
national supervision began with the enactment of the Inter- 
state Commerce Law. The law was the result of a compro- 
mise. It endeavored to maintain competition, and prohibited 
pools, but it did not try to lay down a rigid short-haul rule. 
Not only was pooling forbidden, but under the Sherman Anti- 
Trust Law of 1890 it was subsequently held that even railway 
traffic associations are illegal. The author of the anti-pooling 
clause — Senator Reagan, of Texas, who later served on the 
railway commission of his native state — subsequently con- 
fessed that his original opinion had been erroneous, and the 
Supreme Court of the United States, in declaring the illegahty 
of traffic associations, conceded that they were economically 
beneficial. 

The Act of 1887 prohibited unjust and unreasonable charges, 
and instituted the Interstate Commerce Commission to enforce 
the law. Unhke its English predecessor, the American com- 
mission is not a judicial court, and its decisions are not final 
even as to facts. In the closing years of the century the powers 
of the Interstate Commerce Commission were practically emas- 
culated by various decisions of the Supreme Court so that little 
of its functions remained except the collection of statistics. 
With the beginning of the new century the powers of the Com- 
mission were gradually restored and then increased by legislation. 
After the great agitation due to the efforts of President Roosevelt, 
the Hepburn law of 1906 was enacted, which gave the Com- 
mission definite powers to determine and to prescribe maximum 
rates. The law was now also extended to express and sleeping 
car companies. Furthermore, the commodity clause forbade rail- 
ways from transporting any commodity, other than timber or 
the products thereof, which might be manufactured, mined, or 



596 Transportation [§ 224 

produced by it or in the production of which it might have any 
interest other tnan that of common carrier. Moreover a uniform 
system of accounting (which went into effect in 1907) was pre- 
scribed for all common-carriers. The Mann-EIkins Act of 19 10 
extended the law to telegraph and telephone companies and gave 
the Commission additional powers to prescribe classification and 
to suspend changes in rates. In 191 2 the commission was 
invested with the duty of making a valuation of all the railroad 
property in the country, and in 19 14, the Supreme Court virtually 
held^ that the state railway commissions must give way to the 
national commission in the control of rates. Within a few years, 
however, the rigid restrictions of the law so reduced railway 
profits as to prevent further construction and to limit facilities. 
As a consequence, after the interlude of the war during which 
the railways were managed by the government, the Esch- 
Cummins law of 1920 was enacted. On the one hand, the law 
conferred increasing powers on the Commission not only over 
rates but over traffic, the extension and construction of lines, the 
keeping of accounts, and the regulation of securities. But, on 
the other hand, the law directed the Commission to fix rates at 
such a point as to yield a six per cent return on a valuation to 
be ascertained by the Commission. Furthermore, it not only 
authorized pooling, but directed the commission to elaborate a 
plan for the more comprehensive consolidation of all railways; 
it did away with all state powers over securities; and it created 
a national labor board to adjust differences between the railways 
and their employees. 

Thus the country has started upon a new era. The government 
now exercises a fourfold control over rates, facilities, accounts 
and securities and it provides a fourfold program of aims to be 
achieved: (i) assurance of adequate earnings in order to induce 
proper service; (2) the amicable and more or less automatic 
adjustment of rates and labor disputes; (3) regional operation 

1 In the Shreveport case, decided in May, 1914. 



§ 224] Railway Regulation 597 

with definitely central control; (4) division of profits above a fair 
minimum between the railways and the government. It is not 
unreasonable to hope that such a governmental control of private 
monopoly may be made to redound to the interests of the entire 
community, including the investors, the employees, the shippers, 
and the ultimate consumers. 



CHAPTER XXXIV 
INSURANCE 

225, Reference 

A. H. Willett, The Economic Theory of Risk and Insurance (Columbia 
Studies, XIV, No. 2, 1901); S. S. Huebner, Property Insurance (191 1); 
W. F. Gephart, Principles of Insurance (191 1) and Insurance and the 
State (1913); L. E. Zartman, Yale Readings in Insurance (2 vols., 1910); 
C. Walford, Insurance Cyclopcedia (5 vols., 1871-1880); and Insurance 
Guide and Handbook (3d ed., 1900); A. J. Wilson, The Business of In- 
surance (1904); A. C. Campbell, Insurance and Crime (1902); Journal 
of the Institute of Actuaries (1850-); Transactions of the Actuarial Society 
of America (1889-). 

Special Classes of Insurance: F. Martin, History of Lloyds (1876); 
M. M. Dawson, The Business of Life Insurance (1906); W. Gow, Marine 
Insurance (1895); W. Alexander, The Life Insurance Company (1905); 
B. J. Hendrick, The Story of Life Insurance (1907); F. H. Kitchen, Prin- 
ciples and Practice of Fire Insurance (1904); P. Mayet, Agricultural In- 
surance (1893); E. MacNeill, A Study of Accidents and Accident Insurance 
(1900); C. B. Elliott, Fidelity Insurance (1907). 

226. Nature of Insurance 

The economic life of man is subject to uncertainty. Even 
the old adage that there is nothing sure in life save death and 
taxes is incomplete, because even though the uncertainty does 
not attach to the fact itself, it does attach to the time of the 
occurrence or to the magnitude of the phenomenon. Insurance 
is a device to remove the economic consequences of uncertainty. 

From one point of view it might i be claimed that there is 
no such thing as chance. Everything that happens in the uni- 
verse is obedient to law; that is, it is the result of a cause. If 
we had full knowledge of all causes, we could predict every 
event with accuracy, and thus eliminate such a thing as a 
chance occurrence. For if we previously knew that it was to 
happen at that moment, it would not be a chance. On the 

598 



§ 226] Nature of Insurance 599 

other hand, the word chance may be used in a slightly different 
sense. If a pack of cards has been well shuffled, it is an even 
chance that we turn up at the first deal a black or a red card. 
Chance here means the degree of probability of an occurrence. 
The more numerous the occurrences, the more regularity will 
their be in their happening; so that when we have very large 
numbers, there is even such a thing as a law of chance. 

The degree of uncertainty, however, is not the same thing 
as the degree of probability. When the probability is zero or 
small, the uncertainty indeed is zero or small, and there is no 
chance or little chance. The uncertainty, however, increases 
only up to a certain point. The uncertainty is greatest when 
the chances are even, and then diminishes as the chances in- 
crease, until the uncertainty disappears, when the probabil- 
ity of occurrence becomes infinite. Certainty means either 
no probability or no improbability; after the point of even 
chance has been passed, probability increases as the uncer- 
tainty decreases. 

The term risk may be applied to either probability or un- 
certainty. If there is only one chance in a hundred of a man's 
success in an enterprise, we say that he is taking an immense 
risk. In that case the probability of failure is immense, but 
the uncertainty very small. In ordinary economic life, how- 
ever, men will rarely enter upon any business enterprise unless 
they think that they have at least an even chance of success, 
and usually not unless they think that they have more than 
this even chance. In other words, they will not act unless 
they feel that although both the probability of loss and the un- 
certainty increase together, both may be guarded against. 
Putting it in another way, the risk with which economic 
activity commonly concerns itself is the degree of uncertainty 
rather than the degree of probability. The need of protection 
against risk grows, therefore, with the degree of uncertainty 
which in economic actions increases as probability increases. 

Uncertainty is clearly a disadvantage, which every prudent 



6oo Insurance [§ 226 

man desires as far as possible to eliminate. This can be ac- 
complished in three ways: by avoidance, by prevention, or by 
assumption of risk. 

(i) In certain cases involving the investment of capital, he 
can avoid the risk by joining to the economic transaction in 
question another which counterbalances it. This, as we have 
learned (§ 154), is one of the functions of speculation, as in 
the ordinary ''covering transactions" of the cotton, or wheat, 
or foreign exchange "futures." The scope of such speculative 
transactions, however, is comparatively restricted. 

(2) He can prevent or greatly reduce the degree of risk. 
If he wants to be assured that his house will not burn down, 
he may make it absolutely fire-proof. That, however, involves 
an immense expense which he perhaps cannot afford. If this 
were the only alternative, he would make the house fairly sub- 
stantial, putting capital into it up to the point where the ad- 
ditional cost would in his opinion outweigh the chance of loss 
by fire. An ounce of prevention is worth a pound of cure; 
but two pounds of prevention are not worth a pound of cure. 
In modern society as a whole, far greater sums are spent in 
preventing losses of all kinds than formerly; in fact, govern- 
ment expenditures are to-day to an overwhelming extent of a 
preventive rather than of a remedial character. But that is 
because we realize that the cost of a board of health is insig- 
nificant when compared to that of a plague, or the cost of 
education slight in comparison to the economic and political 
losses due to popular ignorance. Municipal ordinances may 
compel individuals to erect substantial structures, but the 
prevention of risk can profitably go only to a certain point. 
Moreover, no matter how elaborate the precautions, there are 
certain catastrophes against which no human ingenuity can 
avail. Earthquake, lightning, flood and tempest will destroy 
property just as accident, non-employment or illness will de- 
stroy personal income. Something more than prevention is 
requisite. 



§227] Growth of Insurance 601 

(3) He can face and assume the risk, but reduce it by com- 
bining his own risk with that of others into a group and dis- 
tributing the losses to the group as a whole. In this way he 
makes what was uncertain sure. This method, hence, is called 
assurance or, more commonly in modern times, insurance. 

227. Growth of Insurance 

Insurance is in its important manifestations a modern phe- 
nomenon, and a result of industrial capitalism. It is due to 
the fact not so much that men are now more anxious to avoid 
risk than formerly, but that risks have increased to a prodigious 
extent. It seems at first blush absurd to say that modern civi- 
lization, which implies prudence and forethought, should at the 
same time mean increased risk. The contrary assertion, how- 
ever, which assumes that economic progress implies the dimi- 
nution of risk, is clearly an error. Progress and increased risk 
are not incompatible. Uncertainty is assuredly to be depre- 
cated; but if the saving of cost due to a new invention or a 
new economic process exceeds the risk of loss due to the greater 
uncertainty, society is justified in adopting it. An express train, 
for instance, involves more risks than a slow freight, but is none 
the less an indication of progress. It is only when an eighteen- 
hour train is put on between New York and Chicago that it 
becomes a question whether the risk does not outweigh the 
advantage. Up to that point, at all events, it is either directly 
or indirectly an economic gain. The increase of risk in mod- 
ern times is therefore ascribable to the spirit of invention and 
the better utilization of the forces of nature. Risk and progress 
increase together. The pace of modern life is rapid; competi- 
tion and the factory system have engendered uncertainties, 
whereas the leisurely mediaeval methods of customary price and 
handicraft industry meant a slow and certain humdrum. In- 
dustrial capitalism has virtually created risk as well as the way 
of meeting risk through insurance. 

The beginnings of insurance are to be sought in three entirely 



6o2 Insurance [§ 227 

distinct germs: primitive mutual help, the classic bottomry 
loans and the mediaeval rent charges. 

(i) Well-nigh all primitive societies practise some methods 
of collective responsibility. Thus in the earliest Teutonic 
Frithgilds we find mutual responsibility for loss by murder, 
fire, theft, or loss of cattle. Again, in the mediaeval guilds 
the principle of joint guarantee was almost universal. The 
same principle in one sense underlies the modern mutual in- 
surance company. But it would be hazardous to attempt to 
trace any direct connection between these early groups and 
the modern business enterprises. 

(2) The first^ permanent and well-authenticated form of 
business insurance is that of the only kind of enterprise in 
which capital was employed on a large. scale, namely, in over- 
sea trading. Ancient and mediaeval insurance started with 
commercial capital. The marine insurance of the middle ages 
was an outgrowth of the ancient system of bottomry loan, 
known in classic Rome as foenus nauticum or pecunia trajec- 
titia. If the owner of a vessel needed funds, he could secure 
a loan on condition that it be repaid with interest, provided 
the ship were not lost or did not fall into the hands of enemies 
or pirates. The bottomry contract was therefore in a certain 
sense an embryonic insurance, but with the peculiarities that the 
insurance money was paid in advance and that it included a 
loan as well. In point of fact the loan, rather than the insur- 
ance, was the principal thing. When a new form of contract 
was devised in the ItaHan towns of the thirteenth and four- 
teenth centuries, whereby the payment was made after, and not 
before, the loss of the ship, the loan element disappeared and 
the contract became one of insurance. The person who as- 

1 The only instance of insurance, pure and simple, in classic antiquity 
that has come down to us is that mentioned by Boeckh, Public Economy 
of Athens, where Antigenes of Rhodes undertook for a payment of eight 
drachmas per slave to make good his price, as estimated by the owner 
at the time of his escape. 



§ 227] Growth of Insurance 603 

sumed the risk was called the underwriter of the risk. In 
England these marine underwriters or insurers met in the 
coffee-houses, one of which at the end of the seventeenth century 
happened to be owned by Edward Lloyd. This gradually drew 
to it more and more of the underwriters, until by the middle of 
the next century virtually all the marine insurance was done 
at "Lloyd's." 

(3) The final source of modern insurance can be traced 
more particularly in connection with the growth of life insur- 
ance. It is true that marine insurance itself after a time de- 
veloped in part into a kind of life insurance, for it gradually 
became the custom for the underwriter to insure not only the 
ship and its contents in the shape of commodities, 'but also the 
cattle and the lives of the passengers themselves. Far more 
important, however, as a source of life insurance was the 
mediaeval system of rent charges. These were utilized to 
evade the rigor of the usury laws. Loans were made to in- 
dividuals on the transfer of lands for a definite time, during 
which the lender enjoyed the fruits. These fruits were in lieu 
of the interest which was prohibited by statute. Gradually, 
however, instead of transferring the use of the lands them- 
selves, there was substituted in its stead the obligation to pay 
a rent or annuity, called a rent charge, because the annual pay- 
ment was charged on the rent or produce of the land. These 
annuities were either for life or for a term of years. Life annui- 
ties were granted, after a time, even by the church through the 
societas sacri officii. 

From decade to decade, however, the speculative element 
developed. The transaction became popular. It was techni- 
cally not a loan, but a transfer of land. It yielded large 
returns, — eight to twelve per cent on the capital invested. 
More important than all, it was generally accompanied by the 
condition that the principal should be repaid only if the 
annuity-payer (the borrower) should die before the annuitant, 
in the course of time the payment of a capital sum was dis- 



6o4 Insurance [§ 227 

pensed with, but an annuity (premium) was paid every year and 
the capital was handed over only in case of the death of the 
premium payer. Thus the sj^stem became practically indis- 
tinguishable from life insurance. Other mediaeval methods akin 
to modern insurance were the ransom and the marriage-portion 
annuities. In the first case payments were made to individuals 
to provide against possible capture by brigands. In the 
second case the church took loans in the shape of annuities 
from individuals without paying interest, but with the obli- 
gation to pay the capital when the daughter married. In the 
middle of the seventeenth century an Italian by the name of 
Tonti introduced the principle of survivorship in a group and 
thus gave rise to the modern Tontine annuity. 

Out of these small origins the modern system of insurance 
has developed. The most important forms of modern insur- 
ance are marine, life and fire insurance. Marine insurance 
has not changed much in character for several centuries. But 
life insurance could not develop on a large scale until the scien- 
tific principles underlying it were thoroughly understood. 

In every insurance the (gross) premium payable by the 
beneficiary who takes out the insurance is composed of two 
parts, — the so-called loading and the net premium, or sum 
which is mathematically necessary for the creation of a fund 
sufficient to enable the company to pay the policy in full when 
it falls due. The loading is the amount added to the net 
premium to provide for expenses and for contingencies, like 
loss of invested funds or failure to earn the anticipated inter- 
est. The important constituent naturally is the net premium. 
In life insurance this is the joint product of the theory of 
probabilities, the experience of vital statistics and a calcula- 
tion of interest rates. The so-called mortality table shows 
how many in a given large number of persons will live to 
each age, and consequently how many will die at each age. 
It is impossible to predict in what year a particular individual 
will die, but it is possible to state with approximate accuracy 



§ 227] Growth of Insurance 605 

how many out of a given number will die at any specified 
age. On the basis of such a mortality table it is a simple arith- 
metical computation to ascertain the premium necessary to be 
charged at any given age in order to create a fund which will 
accumulate to a fixed point at a given rate of interest. The 
first attempt to apply mathematical principles to life annuities 
was made in 167 1 by Jean DeWitt, grand pensionary of Hol- 
land and West Friesland. The first approximately correct 
mortality table was constructed by Dr. Edmund Halley in 1693. 
As these tables became more precise, life insurance developed 
as a business. The first enterprise started on a really scientific 
basis was the Equitable Society in London in 1762. In America 
the first society was the New York Life Insurance and Trust 
Company, inaugurated in 1830. 

The centre of marine insurance is still in England. But with 
the uncertainties, the vicissitudes and the magnitude of modern 
business life in the United States, the American life insurance 
companies have far transcended all others in importance. Of 
the amount of life insurance in force in the world in 1905 four 
American companies — the Equitable Life, the Mutual Life, 
the New York Life and the Northwestern Mutual Life com- 
panies — had between a third and a quarter of the entire amount. 
The figures are as follows: 

The four American companies .... $5,680,316,147 
All other life insurance companies in the 

world $13,862,232,600 

Total $19,542,548,747 

Wherever uncertainty can be removed we find insurance. 
In addition to life, fire and marine insurance, there have 
developed in recent years cattle insurance, hail insurance, glass 
insurance, windstorm and tornado insurance (first in America 
in 1 861), aqueduct insurance (against the risk of damage from 
a break in the aqueduct or water mains), boiler insurance, 
burglary insurance, elevator insurance, automobile insurance, 



6o6 . Insurance [§228 

credit insurance (through the credit indemnity companies), 
guaranty insurance (against the risk of breach of trust by offi- 
cials), accident insurance, illness insurance, out-of-work insur- 
ance, old age insurance, insurance against damages to others 
by defects in the insurer's premises, and loss-of-rent insurance. 
We even find such remarkable examples as machine insurance 
(against the risk of damage through the carelessness of work- 
men), strike insurance, crop-failure insurance, gate-receipts 
insurance (in sporting matches) and insurance of the voice of 
a prima donna. In Russia there is a company which insures 
individuals against the economic consequences of political per- 
secution, and in England and America there has even been 
talk of insurance against divorce and insurance against twins. 

228. Theory of Insurance 

The essence of insurance is the effort to diminish the risks 
of uncertainty. Insurance is productive, that is, it involves an 
increase of wealth, because it lessens the social costs of risk. 

We must be careful not to confuse the loss due to the uncer- 
tainty with the loss due to the occurrence itself. The occur- 
rence is bound to happen. Death will come, fire will consume, 
the tornado will strike. In some cases the probability of the 
occurrence or the amount of the loss may indeed be some- 
what lessened by preventive action. A good police force will 
diminish burglary; an efhcient fire department and a model 
building code will decrease fire losses; carefully devised factory 
laws will lessen accidents. In all these cases, however, we have 
to deal with prevention, not with insurance. Insurance takes 
the fact itself for granted; it does nothing to eliminate the 
occurrence. The loss is hence the same, whether we have 
insurance or not; the house is burned and there is less wealth 
than before. 

There is, however, in every case an additional loss, due not 
to the occurrence but to the uncertainty. This can be most 
clearly seen in the investment of capital. The ordinary man 



§ 228] Theory of Insurance 607 

will not assume risks unless he is remunerated for it. In the 
case of the entrepreneur, indeed, the assumption of risk is one 
of the elements in enterprise, because he expects in the end to 
derive profits sufficiently large to compensate for possible 
immediate losses. But when a capitalist loans funds, and there 
is any special degree of risk connected with the transaction, it 
is a familiar fact that he will increase the rate of interest by a 
corresponding amount. This increase in the interest rate is an 
addition to the expenses of the borrower. If the risk is not 
peculiar to the individual borrower, but it is connected with the 
entire class of transactions in question, and if the borrower 
utilizes the loan in productive enterprises, the increase in the 
interest rate becomes an addition to the cost of the product 
and thus to the price ultimately charged to the consumer. In 
other words, if the uncertainty could be eliminated, the price 
of the commodity would be lower and there would be a corre- 
sponding gain to the community as a whole. What is true of the 
investment of capital is true of the employment of any produc- 
tive factor. Wherever there is an economic action — whether 
it be the application of labor, the employment of capital, or the 
utilization of any form of wealth — uncertainty results in a 
lower degree of productivity or in a smaller surplus of utility 
than would be the case if the uncertainty were obviated or 
decreased. Insurance minimizes this uncertainty and is ac- 
cordingly productive of wealth. 

Like transportation, insurance falls under the head of ex- 
change of wealth, while exchange, as we know, is itself a species 
of production. Improved transportation reduces the cost of hav- 
ing a commodity in one place become a more valuable commodity 
in another place; improved insurance reduces the cost of having 
the uncertainty of the future change into the more valuable cer- 
tainty of the present. Transportation overcomes the disadvant- 
ages of space; insurance overcomes the disadvantages of time. 
Transportation is productive because it increases space utilities; 
insurance is productive because it increases time utilities. 



6o8 Insurance [§ 228 

It will be asked, however, how does insurance minimize un- 
certainty? The answer is, through the combination of risks. 
This is a result of the law of probabilities. If we have accu- 
rate statistics of fires, for example, for a term of years and 
take the number of fires with a given number of houses during 
that period, we get an average. If the figures in any year 
corresponded exactly to the average, there would be a cer- 
tainty in the number of fires, and the only uncertainty would 
be as to which house would burn. In point of fact, however, 
in any particular year there will be a variation from the aver- 
age. According to a well-established law, the probable varia- 
tion increases only as the square root of the number of cases. 
If there are a hundred times as many houses, there will be only 
ten times as much probable variation from the average loss. 
Hence the larger the number of cases, the less will be the uncer- 
tainty as to the amount of loss which will be borne by the group 
as a whole. Insurance combines the risks into a group, and 
thus reduces the element of uncertainty. The risk of the group 
is less than the sum of the risks of the individuals who form 
the group. 

An individual can manifestly not afford to insure himself, 
because the insurance fund which he would be obliged to accu- 
mulate would be out of all proportion to his possible earnings. 
An immense corporation, like a steamship company with hun- 
dreds of vessels, may practise self -insurance with a better chance 
of success; but the advantages of having the insurance business 
entrusted to a separate class is so pronounced that self-insur- 
ance is extremely rare. The great benefit of an insurance 
company is not only that the risks are combined, but also that 
they are transferred to a class who can afford to make a special 
study of the problem, and who can thus reduce the cost of in- 
surance by displaying their ability to estimate uncertainties. 
Whether the company is a stock corporation or a mutual 
company is of importance only as to the ultimate distribution 
of the profits of the enterprise: in the one case, as in the 



§ 229] Regulation of Insurance 609 

other, however, the management of the business is confided 
to a class of experts. The more adept the insurance com- 
panies, and the more scientific their methods, the closer will 
be the correspondence between the preparation for, and the 
fact of, loss and the smaller will be the accumulation of the 
necessary insurance fund, the lower will be the insurance pre- 
mium, and the greater will be the net gain to the community. 
Insurance properly conducted is the opposite of gambling. If 
any one takes out an insurance policy, he frees himself from 
an existing uncertainty and transfers the risk to some one who 
is more qualified and ready to assume it; if he makes a wager 
with another, the newly created uncertainty attaches to both. 
Insurance is the transfer and reduction of risk; gambling is the 
creation and increase of risk. 

229. Methods and Regulation of Insurance 

The primary function of the insurance company is to reduce 
uncertainty. Insurance companies as business enterprises, 
however, seek to enlarge their profits in other ways. 

(i) Sometimes insurance companies endeavor to combine 
the business of insurance and of prevention. Strictly speak- 
ing, the insurance premium is the payment made to the com- 
pany to induce it to assume the risk. But fire insurance 
companies, for instance, conduct the fire-patrol system, and 
organize for protecting coverings in case of fire; and the cost 
of this is added to the insurance proper and is included in the 
so-called premium. In reality, however, as we have seen, this 
is prevention, not insurance: it tends to reduce the loss through 
the occurrence, not the uncertainty of the occurrence. In the 
same way certain fire insurance companies make a lower rate 
when the insurer engages to use certain precautions, like better 
buildings, automatic fire-sprinklers, etc. This again is no 
insurance, but prevention. 

(2) Life insurance companies do an immense business not 
alone as insurance companies but as media of secure invest- 
39 



6io Insurance [§229 

ment. As a consequence there is a great variety in the kinds 
of policies issued. The ordinary form is the annual dividend 
policy. Here, by the time the second annual premium is pay- 
able by the poHcy holder, a dividend is declared on the policy. 
This may take the form of a "reversionary addition" which is 
added to the amount of the insurance, the premium remaining 
the same; or it may be a "cash dividend," necessarily smaller, 
which can be used to reduce the premium, the amount of the in- 
surance remaining the same. With every year this dividend 
grows, and after the lapse of several years the policy acquires a 
"cash surrender value," that is, a sum which the company will 
pay to the holder on the surrender of the policy. In lieu of 
the annual-dividend poHcy, the holder may prefer a deferred- 
dividend policy, according to which a cash sum or its equivalent 
will be paid at the end of a term of years. Thirdly, he may 
choose a policy, without any dividends at all, the so-called 
non-participating policy, under which he obtains his insurance 
at a lower rate in consideration of the fact that he waives all 
claims to dividends. Again, the policy may be either a life 
policy payable upon his death or an endowment policy, whereby 
the insurance is payable to the beneficiary at the expiration of 
a certain period. These endowment policies may, like the 
others, be issued either on the annual-dividend or the deferred- 
dividend plan. Finally, the poHcy may be a term poHcy or 
a limited-payment life poHcy, where the premiums do not con- 
tinue for life, but are limited to a definite number of years, 
after which the policy becomes "paid up" and remains in 
statu quo until the death of the insured. Moreover, there 
may be all manner of combinations of these various kinds of 
poHcies, such as continuous-instalment-endowment, yearly- 
renewable-term, return premium, and double-endowment 

policies. 

It is especially in such cases as this, where the accumulated 
surplus becomes so enormous, that the wider problem of public 
policy assumes considerable importance. In the case of banks, 



§ 229] Regulation of Insurance 611 

as we know, legislation is needed to protect the reserve. In 
the case of insurance, which is primarily a method of making 
accumulations to protect the great mass of beneficiaries, the 
need of regulation is even more obvious. Almost all of the 
American states have a legislative code and an administrative 
department designed to control the various classes of insurance 
companies. 

The recent scandals connected with the financial manage- 
ment of the leading insurance companies in the United 
States, have emphasized the necessity of a more carefully 
devised legislation and a more effective supervision calculated 
to enforce responsibility and to guarantee solvency. In some 
countries, as in Australia, the public is so solicitous of the in- 
terests of the policy holders that the government has even 
assumed the management of the insurance business, at least in 
part. Some of the American commonwealths, like Wisconsin, 
have also made a similar beginning in the state provision for 
life insurance. Radical as such a step may seem, it is at all 
events indisputable that there is both room and need for 
careful public scrutiny and effective social supervision of a 
business that has intertwined itself with the very roots of 
modern economic life. 

In the above exposition we have only rarely alluded to one 
group of insurance which represents social policy rather than 
business interests, and which is primarily applicable to the great 
mass of the working population — namely so-called social in- 
surance. This is so important that we must assign to it a sepa- 
rate discussion (chapter xxxviii). 



Part IV 

Government and Wealth 



CHAPTER XXXV 
SOCIALISM AND PUBLIC OWNERSHIP 

230. References 

Socialism: T. Kirkup, History of Socialism (3, 1906); J. Rae, Con- 
temporary Socialism (1908); A. E. F. Schaeffle, The Quintessence of 
Socialism (1889); W. Sombart, Socialism and the Social Movement in the 
Nineteenth Century (1909); O. D. Skelton, Socialism, a Criticism and 
Analysis (191 1); M. Beer, History of English Socialism (1919); W. E. 
Walling, Socialism as it is (191 2) and The Larger Aspects of Socialism 
(1913); E, V. Zenker, Anarchism, A Criticism and History (1898); 
J. Spargo, Socialism (1910); M. Hilquitt, History of Socialism in the 
United States (1903) and Socialism in Theory and Practice (1909); V. G. 
Simkohvitch, Marxism and Socialism (191 2); E. Bohm-Bawerk, Marx 
and the Close of his System (1891); J. W. Hughan, The Facts of Socialism 
(1913); J. G. Brooks, American Syndicalism: the I. W. W. (1913); 
L. Levine, Syndicalism in France (Columbia Series, 1914); R. F. Bris- 
senden, The I. W. W. {Ibid., 1919). 

Public Ownership: H. C. Adams, The Relation of the State to In- 
dustrial Action (Am. Economic Association, Publications, I, 1886); E. W. 
Bemis, ed.. Municipal Monopolies (1899); Major Darwin, Municipal 
Trade (1904); B. Shaw, The Common Sense of Municipal Trading (1904); 
The Facts of Municipal Ownership, Report of the Commission of the 
National Civic Federation (3 vols., 1907); D. F. Wilcox, Municipal 
Franchises (2 vols., 1910-11). 

Subsidies: R. Meeker, History and Theory of Shipping Subsidies 
(1905); W. W. Bates, The American Merchant Marine (1902); F. R. 
Rutter, The International Sugar Situation (1905); R. G. Blakey, The 
Beet Sugar Industry and the Tarif (191 2). 

231. Socialism 

Government was devised in large measure to afford protec- 
tion and to subserve the economic interests of the community. 

612 



§231] Socialism 613 

From the very outset therefore more or less influence was ex- 
erted by the constituted authorities on the progress of wealth. 
While the state, however, has always participated in economic 
life, there have been two opposing theories, neither realized 
in practice, but both nevertheless advanced as ideals toward 
which human effort should be directed. 

On the one hand we have the advocates of laissez-faire. 
Their programme is ''hands-off," and their aspiration is to 
reduce the function of government to the narrowest possible 
Hmits. The logical conclusion of such a theory is anarchy or 
no government. For even if we accept the "policeman the- 
ory" of the state, — the doctrine that government is instituted 
only to protect liberty and property, — it is obvious (as was 
pointed out in chapter xi) that protection involves some re- 
straint on the liberty of others. If, therefore, restraint or in- 
tervention is to be completely abolished, there must be no 
restrainer, that is, no government. While we may reasonably 
object to the ordinary anarchist who illogically uses violence 
in order to bring about the absence of compulsion, the theoret- 
ical anarchists like Tolstoi and Kropotkin in Russia, Proudhon 
and Reclus in France, Warren and Tucker in America, are true 
to their premises. If we are to have no immixture of govern- 
ment in the economic life of the individual, it must be con- 
ceded that the only sure means of compassing the desired end 
is to abolish government. 

At the opposite pole are to be found those thinkers who 
discover the root of all economic evil in private property. 
Here, again, the logical conclusion is that of communism, the 
entire sinking of individual property rights in those of the 
group. This is, however, so manifestly opposed to the consti- 
tution of human nature that the idea has remained a counsel 
of perfection. Every communistic experiment has been more 
or less short-lived. Less thorough-going but almost equally 
ideal is socialism, which is willing to admit private property in 
consumption, but demands a community of production, that 



6 14 Socialism and Public Ownership [§231 

is, the assumption by organized society of all the means of pro- 
duction. According to the ''scientific socialists" private prop- 
erty in the means of production is an anachronism. 

While socialistic theories are almost as old as economic 
speculation itself, it is only since the advent of the modern in- 
dustrial system that socialism has taken a deep hold on the 
mass of men.' This is obviously due to the fact of the prodigious 
increase of wealth, coupled with the triumphant march of de- 
mocracy, — both of them, as we know, the results of industrial 
capitalism and the factory system. The unlocking of the secrets 
of nature, the conquests of new worlds, and the vast opportu- 
nities opened to private initiative have made this the era of 
individuaHsm. The hardy, the venturesome and the conspicu- 
ously able, together with the adroit, the fortunate and the occa- 
sionally unscrupulous, have hailed the advent of these well-nigh 
Hmitless chances to forge ahead, with but scant regard to the 
coincidence between their interests and those of others. The 
Anglo-Saxon "Each for himself, and the devil take the hind- 
most," like the Romanic "God helps him who helps himself," 
has been the watchword of modern economic life. 

In contrast to this idea is to be noticed the solidification of 
a wage-earning class, now definitely separated from the owner- 
ship of the tools of production. Their very progress to a more 
human standard of life has made them painfully conscious 
of the inequalities of wealth and opportunity, of crying social 
evils and miscarriages of justice, and of the seizure by indi- 
viduals of much that seems to them the national heritage. In- 
stead of being the voice of envy and confiscation, as it often 
appears to the smug, the sleek and the contented, socialism is 
to the elect few an inspiring ideal and a veritable religion; 
while in the case of the mass it is an inarticulate cry of anguish 
and a vague expression of the demand for social progress. 

Yet with all its inspired ideals socialism is as one-sided as 
anarchism. If anarchism forgets the state, socialism forgets 
the individual. If anarchism exaggerates the possibilities of 



§232] Public Ownership 615 

private action, socialism exaggerates those of public action. 
The economic theory of "scientific socialism" is, as we have 
repeatedly seen, completely erroneous. It starts out with the 
defective labor theory of value; it unjustifiably restricts labor 
to manual labor; it misconceives the theory of profits; and it 
erects into a veritable fetish the doctrine of class conflict. So- 
cialism as a movement, however, is not bound up with any such 
scientific or unscientific theories. Practical discontent, not sci- 
entific formulae, has engendered modern socialism; to Lassalle 
and not to Marx must be ascribed the real paternity of social- 
ism as a practical movement. 

In his anxiety to escape from the evils of the present, the 
socialist is willing to entrust himself to the fortunes of a dubious 
future. Impatient of the shortcomings of distribution, he does 
not realize that his scheme will endanger production. Desir- 
ous of eliminating profits, he does not see that he will stifle 
progress. In his effort to remove actual inequalities he bids 
fair to reduce economic life to the hopeless level of a dull and 
low uniformity. With human nature as it exists at present, 
and as it bids fair to continue for an incalculable future, social- 
ism, if ever realized in practice, as at present in Russia, would be 
the death knell of economic advance and true social betterment. 

232. Development of Public Ownership 

To affirm, however, that socialism, or the assumption by 
government of all the means of production, is theoretically in- 
defensible and practically injurious, does not imply that the 
government must refrain from assuming any of the means of 
production. If there are any criteria by which to distinguish 
between different kinds of enterprises, it is possible to advo- 
cate government ownership in some cases without incurring 
the imputation of socialism, or involving the necessary accept- 
ance of government ownership in other cases. 

It may be laid down in general that there are three con- 
ditions of government ownership. The government must do 



6 1 6 Socialism and Public Ownership [§ 232 

what the private individual cannot do, will not do and ought 
not to do. Private enterprise can, for instance, no longer 
provide an army or a navy. Again, private enterprise was not 
willing to construct the first New York subway. Finally, it is 
universally agreed that such matters as justice and police pro- 
tection ought not to be left, as formerly, to private individuals. 
There is, however, still a large fringe of occupations where 
there is an opportunity of discussion as to whether private in- 
dividuals ought to be permitted to carry on the enterprise. It 
is in this fringe that the modern problem of government owner- 
ship has arisen. 

Government enterprise in such occupations may be divided 
into fiscal and social monopolies. The government may decide 
to monopolize a business for purely fiscal reasons. In the case 
of certain raw materials or easily manufactured articles of wide 
consumption which readily lend themselves to the purposes of 
taxation, the government may prefer to conduct the operation 
itself and to enjoy the monopoly profits. Thus some of the 
European governments have a monopoly of the sale or sometimes 
of both the sale and the manufacture of tobacco. In others 
we find a government monopoly of salt, and in the Eastern 
countries we find monopolies of opium, of tin and of other 
commodities. The monopoly of spirits, however, as in Russia, 
Switzerland and up to 1907 in South Carolina, is only partly 
fiscal in character. 

A consideration of fiscal monopolies belongs properly to the 
science of finance. It may be said, nevertheless, that in the 
most progressive countries fiscal monopolies are not desirable, 
because the government at best secures as revenue only the 
surplus between cost and selling price, while in the case of pri- 
vate competition there would be a tendency for cost to fall. 
In the former case, therefore, the public really loses more 
than the government receives, while in the latter case the 
government may secure the same revenue through indirect 
taxation, and the price of the product to the consumer will 



§232] Public Ownership 617 

nevertheless be lower. When the political objections to a high 
indirect tax, however, seem considerable, or when the chances 
of private competition are increasingly remote, it may be wise 
to secure the desired revenue by fiscal monopoly. 

Some fiscal monopolies, indeed, are no longer tolerated by 
public opinion. This is in general true of lotteries, which 
were extensively employed in former times: especially in 
America many churches and educational institutions were 
started through this agency. Government lotteries were prob- 
ably based an the quaint defence of Petty in the seventeenth 
century: "A lottery is properly a tax upon unfortunate self- 
conceited fools. The world abounds in such fools; it is not 
fit that every man that will may cheat every man that would 
be cheated. Rather it is ordained that the Sovereign should 
have guard of these fools, even as in the case of lunatics and 
idiots." Nowadays, by a revulsion of popular feeling, not only 
public, but private, lotteries have disappeared in Anglo-Saxon 
countries. The continuance of the government lottery in 
southern Europe and in even so enlightened a country as Prussia 
is as surprising as it is deplorable. 

Contrasted to the fiscal monoplies of government are the 
social monopolies, that is, enterprises which are undertaken 
by government for general social reasons. If we look at the 
existing examples of government ownership, we shall find that 
they may be included under the following heads: 

I. Transfer of values : (i) Coinage; (2) Non-Metallic Money; 
(3) Banking. 

II. Transfer of Products: (i) Markets; (2) Docks and 
Piers. 

III. Transmission of Intelligence: (i) Post-Office; (2) Tele- 
graph; (3) Telephone. 

IV. Transportation of Persons and Freight: (i) Roads; 
(2) Canals; (3) Ferries; (4) Bridges; (5) Railroads; (6) Ex- 
press Companies. 

V. Transmission of Utilities and Power: (i) Waterworks; 



6i8 Socialism and Public Ownership [§232 

(2) Gas and Electric Light Works; (3) Electric Power Works; 
(4) Steam-Heat and Hot- Water Lines; (5) Irrigation and 
Power Canals. 

What is common to all these enterprises is that they are of 
fundamental social importance, and either lie, or may lie, at the 
basis of general industry. This is, in fact, the criterion which 
distinguishes them from ordinary occupations, — the existence 
of a sufficiently widespread common interest and public im- 
portance to warrant their assumption by the government 
authorities. This interest and importance did not always ex- 
ist, do not everywhere exist at present, and are not found in 
the same degree in the various occupations or countries. With 
wide variations in detail, we can trace a general law of develop- 
ment, in five stages: 

(i) Everywhere at first all of the above enterprises are in 
private hands, and are used for purposes of profit and some- 
times of extortion, like the highways, the coinage and the post 
offices of mediaeval Europe, or the early bridges, canals and 
markets. 

(2) In the next stage they are "affected with a public 
interest" and are turned over to trustees who are permitted to 
charge fixed tolls, but who are required to keep the service up 
to a certain standard.. This was the era of the canal or turn- 
pike trusts and companies. 

(3) In the subsequent stage the government assumes the 
business, but manages it for profit, as is still the case in some 
countries with the postal and railway systems. 

(4) In the fourth stage the government charges tolls or fees 
to cover expenses only, as was recently true of canals and 
bridges, and as is the theory of the postal system and municipal 
water supply in America to-day. 

(5) In the final stage the government reduces charges until 
finally the service is free and the expenses are defrayed by a 
general tax on the community. This is the stage now reached 
in the common roads, in the coinage, in most of the canals 



§2331 Conditions of Public Ownership 619 

and bridges, and which has been seriously proposed by officials 
of several American cities for other services, like the water 
supply. 

It is obvious, however, that many of the industries referred 
to have not gone through the whole of this evolution, and that 
some of them still remain in the first stage. It is also clear 
that where we find other isolated examples of government 
ownership, as in the case of powder mills or shipyards or ord- 
nance factories or even in the insurance business and frozen-meat 
transportation of Australasia, we must ascribe them to the 
sense of the overwhelming public importance of the enterprise 
and the inadequacy or proven unfitness of private individuals 
to conduct them. What, then, are the reasons that weigh 
with some communities in inducing them to permit industries 
of paramount public importance to remain in private hands? 

233. Conditions of Public OTvnership 

The three conditions which must be carefully weighed before 
government ownership and management of any industry are 
decided upon are: (i) the simplicity or complexity of the 
enterprise; (2) the amount of capital invested; and (3) the 
effectiveness or ineffectiveness of social control. 

In the case of the industries included on page 617 under 
the head of transfer of values there is comparatively little dis- 
cussion. The coinage of money is now everywhere conceded 
to be a public function. In the case of the banking business, 
however, which is far more complex, calls for a large capital 
and is easily made amenable to public control, the decision is 
clearly in favor of private ownership. The only moot question 
is as to whether the paper currency should be issued by private 
banks or by the government. The decision of this question is, 
as we have seen, largely dependent upon political conditions. 

Coming to the industries mentioned under the second head, 
it is to be noted that the markets, which in the middle ages 
were almost exclusively private, are now generally in public 



620 Socialism and Public Ownership [§ 233 

hands. In England as elsewhere m Europe the vested rights 
of individuals in the markets are being bought out by the local 
corporations. In America the large provision markets are fre- 
quently owned by the cities, and yield a substantial income. 
In the case of the docks and piers, much the same develop- 
ment has taken place. In America the progress has not been 
so rapid as abroad, but in cities like New York the municipali- 
zation of the water front is leading to a great increase of facili- 
ties as well as of public revenue. 

When, however, we come to the last three classes in the 
schedule, we reach burning problems. In a few of the sub- 
divisions, indeed, the controversy has been laid to rest. For 
instance, in the case of the common highways the process is 
about complete and the private turnpike companies have well 
nigh disappeared. In certain rural sections there is still some 
debate as to whether the roads should be toll roads or free high- 
ways, but in general it may be said that the discussion is 
a thing of the past. 

The same is true in the main of bridges and canals. The 
old private canals have almost entirely vanished, and it is only 
about a quarter of a century ago that canal tolls were abolished 
on the Erie Canal. In the case of ferries a similar development 
is to be noted; in Boston and New York City the process of 
municipalization is proceeding apace. 

The same considerations apply to the fourth class of indus- 
tries. Everybody, with the exception of extreme individualists 
like Herbert Spencer, is agreed . that the post-office should be 
in public hands. The amount of capital invested is 'insignifi- 
cant, nothing being needed but the sites and buildings and a 
few simple devices for stamping and transporting the letters; 
the management also is comparatively simple. Yet even in 
the post-office it is a notorious fact that government manage- 
ment is more costly than private management. An American 
postmaster-general once stated that if he were at the head of 
a private company he could perform the postal business about 



§233] Conditions of Public Ownership 621 

one-fourth cheaper, by a more effective administration and 
consolidation of post-offices, which is now impossible because of 
political conditions. 

Nevertheless, no one would think of abandoning the govern- 
ment postal service. The only controversy arises over what are 
in other countries ancillary features of the service. Such, for 
instance, is the parcels post. Almost everywhere, except until 
very recently in the United States, this is a well-recognized 
postal function; here, however, the private express companies 
were so firmly intrenched that it was not until 1913 that the 
parcels post was introduced. All the arguments in favor of a 
letter post apply almost equally well to a parcels post. 

In the case of the telegraph practically the same is true. 
The investment of capital is indeed somewhat greater than in 
the case of the post, but it is still insignificant as compared 
with other interests, while the complexity of management is 
likewise slight. In every other country in the world, including 
England, Australasia and Switzerland, the telegraph, although 
frequently starting out in private hands, has been brought 
under government management. In the United States, in 
fact, the telegraph began as a government business in 1844, 
and was abandoned chiefly because the postmaster-general at 
that time erroneously thought that it would prove a dire fail- 
ure, and did not desire to commit the government to a haz- 
ardous experiment. Yet the originator of the telegraph, who 
was wise enough to appreciate the final outcome, did not con- 
ceal his opinion that it ought to form a natural adjunct to th« 
government post-office. 

The chief reason why there is not a louder outcry for a govern- 
ment telegraph is that the abuses of the private telegraph 
are not important. On the other hand, it must not be for- 
gotten that while postal rates are lower here than abroad, tele- 
graph rates are much higher, for short as well as for long dis- 
tances. The use of the telegraph service in the United States 
is accordingly far slighter than in England or France. Every 



622 Socialism and Public Ownership [§ 233 

argument in favor of government post applies almost equally 
to the telegraph. 

In the case of the telephone the situation is a little different. 
The complexity of management is indeed slightly greater than 
in the telegraph, and it requires somewhat more care to keep up 
to the level of modern science. Nevertheless the difference is 
not material. Most countries have nationalized their telephone 
system, and even in England, where the private telephone was 
at first in complete control of the field, it was taken over in 
191 1 by the government. But while under government man- 
agement abroad telephone rates are in some cases lower than 
in the United States, the efficiency of management abroad 
cannot be compared with that in the United States. The 
choice is really one between low government rates coupled 
with poor service and high private rates accompanied with 
good service. 

While the arguments hitherto advanced would lead to govern- 
mental assumption of the telegraph and in a less degree to 
that of the telephone, they would lead to precisely the opposite 
conclusion in the case of railways. There are, in fact, three 
sets of arguments against government railways, — the economic, 
the fiscal and the political argument. 

(i) The railway is the most stupendous of modern industries. 
Not only is the capital account enormous, but the railv/ay 
business calls for the most delicate handling, and must needs 
pay for the highest possible business ability. Railway presi- 
dents of single lines to-day receive salaries superior to that 
of the President of the United States; for without consum- 
mate capacity the attempt to run a railway would be a failure. 
The time may come in the distant future when democracy 
will be willing to pay higher salaries, and when the ablest men 
will be ready to give up comfort and wealth for the more ideal 
end of serving the public. Under present conditions in the 
United States, however, to turn over the greatest, the most 
complex and the most fundamental industry of modern times 



§ 234] Municipal Monopolies 623 

to the government would inevitably lead to such a decrease 
in efficiency as to become well-nigh intolerable. 

(2) The revenues of our railways were, before the Great War, 
about triple those of the government. The entire budget would 
then depend upon the temporary prosperity or ill fortune of the 
railway system. In bad times the railway revenues shrink by 
tens or even hundreds of millions. This would so embarrass 
the income side of the national budget as to necessitate a com- 
plete revolution not only in our tax system, but also in our 
entire budgetary methods. This point, hitherto almost com- 
pletely overlooked, would in itself suffice to defeat the scheme 
for government railways. 

(3) In comparison with railway charges within the country, 
tariff rates into the country are of slight importance. The 
political demoralization that occurs whenever a new tariff is 
framed is familiar to all. The imagination shrinks from the 
thought of what would happen in the United States if the nec- 
essarily continuous manipulation of railway rates were entrusted 
to the tender mercies of the legislature, or of an administrative 
body under its immediate influence. 

These arguments against government railways in the United 
States do not of course imply that the railways should be let 
alone. Social control of private railways, however, has as yet 
scarcely begun, and until the ineffectiveness of social control 
has been affirmatively proven it would be rash in the extreme 
to plunge into government ownership. 

234. Municipal Monopolies 

There still remain for discussion the fifth class of businesses 
mentioned on page 617. It will be observed that with the 
exception of the last item they have two points in common: 
they are local enterprises and, because they depend on the 
use of the streets which cannot be continually torn up, they 
tend to become monopolies. It is for these reasons that they 
are usually called municipal monopolies, or public utilities; and 



624 Socialism and Public Ownership [§ 234 

because of these facts the street railways or omnibus lines are 
ordinarily included in the same category. 

In the United States municipal ownership has been common 
in the case of waterworks, somewhat less usual in electric 
lighting, rare in gas works, and only just beginning in street 
railways.- In Great Britain, on the other hand, waterworks 
have ordinarily been in private hands, but gas works to a large 
extent under municipal control, while of late there has been 
a marked tendency toward municipal tramways and electric 
lines. In 1902, for instance, there were 118 municipal tram- 
ways with 855 miles of track, as compared to 115 private tram- 
ways with 598 miles of track. *In the United States, in 1902, 
fifty-three per cent of all waterworks were in the hands of the 
public, and in cities of over 8,000 population the waterworks 
were owned by the municipalities in 135 cases, by private com- 
panies in only 36 cases; while the gas works were owned by 
the cities in only 5 cases, by private companies in 130 cases. 
At the same date only 13 cities owned their electric lighting 
plant. The chief examples of municipal street railways in 19 14 
were the New York and Boston subways, and the electric surface 
railways in Seattle, San Francisco, Detroit and Bay City. 

In the case of the water supply the arguments are decidedly 
in favor of municipal ownership. The social interests are of 
the most commanding importance, and there is the utmost 
simplicity of management. When the watershed, the aqueduct 
and the water-pipes are ready, nothing is needed but a few 
engineers to regulate the pressure and a few workmen to re- 
pair leaks. It is true, indeed, that with the growth of cities the 
necessary capital augments, until as in the case of New York 
tens of millions may be needed. On the other hand it must 
be remembered that water rates can easily be fixed at such a 
point that, without unduly burdening the public, they will be 
sufiicient to defray interest on the debt as well as the running 
expenses. Even here, however, the experience of our large 
cities shows how important is a good system of municipal 



§ 234] Municipal Monopolies 625 

accounting in order that the capital and income accounts may- 
be kept distinct, and in order that the public may understand 
what is the actual cost of the enterprise. 

With the gas business the matter is not so simple. Here 
the complexity of management is considerably greater. The 
stimulus of private initiative is needed to a far greater extent 
in order that the management may avail itself of the constant 
improvements in the process, thus leading to a reduction of cost. 
In the one great example of municipal gas ownership that 
has existed in America, — namely, in Philadelphia, — the 
results were satisfactory neither to the treasury nor to the 
consumer. Whatever may be said of the dubious methods 
employed by the private monopoly to which Philadelphia has 
farmed out the management of the gas service, there is little 
doubt that the consumer as well as the city has profited in a 
noteworthy degree. 

In the case of the electric light the arguments in favor of 
municipal ownership are somewhat more convincing, at all 
events in the smaller towns, where natural conditions are favor- 
able and where the outlay is relatively inconspicuous. Although 
the complexity of the enterprise is largely minimized, consider- 
able care must still be observed in the financial management. 

Finally, with street railways the arguments for municipal 
operation are less strong than in either the water or the elec- 
tric light supply. For here, although the complexity of man- 
agement is by no means so great as in the ordinary railroad, it 
is of far more importance than in the telegraph, the telephone 
or waterworks. It is unlikely that the municipal authorities 
of any American city would have had the courage to undertake 
such revolutions in the methods of transportation as have 
been completed during the past few decades in our chief cities. 
Furthermore, the financial problems involved are intricate. 
Even if municipal ownership be decided upon, however, the 
argument would seem to be in favor of following the plan of 
the New York subway, — namely, government ownership but 
40 



626 Socialism and Public Ownership [§ 234 

private management under conditions fixed by the municipality, 
which should safeguard the social interests of the community, 
the needs of the treasury, and especially the legitimate de- 
mands of the employees. In this way the best features of each 
system might be retained. 

It is obvious, then, that in considering this problem we must 
not be led away by preconceived notions on either side. The 
outcry of socialism is a bugaboo, for in these enterprises free 
competition is inapplicable. The only choice is between a pub- 
lic monopoly and a private monopoly under social regulation. 
The problem is not simply the abstract one of the general lim- 
its of government activity, but the very concrete one as to how 
far the practical political conditions in any locality permit of 
the application of the abstract principle. We may all agree 
that in these enterprises the public element is the predomi- 
nant one. We may all concur in the belief that even where it 
seems desirable to retain for a time the management in pri- 
vate hands, the period may come when the advantages to be 
derived from private management under social control will be 
outweighed by the benefits of direct government operation. 
Yet in a democracy it is always wise to make haste slowly and 
to refrain from taking a leap in the dark. It is more than likely 
that the future has in store a complete transference of quasi- 
public enterprises to the public itself, if for no other reason 
than to check the corruption and control of local politics by 
vast business enterprises. Until general economic and politi- 
cal conditions, however, are ripe for such a radical change, the 
probable result would be the substitution of one kind of cor- 
ruption for another, and the realization of an abstract principle 
at the cost of efficiency and progress. That social control of 
quasi-public enterprises will in the near future undergo a marked 
development is beyond all question. But it is not until social 
control has been tested and found wanting that we shall be 
ready for the further step of public management of the gas 
supply and the street railways. 



§ 235] Government Regulation 627 

235. Government Regulation 

If government ownership is, as we have seen, limited to a 
comparatively narrow range of occupations, government regu- 
lation of private enterprise is widespread. There are two 
currents discernible in the course of history: one has set away 
from government interference; the other in its direction. The 
progress of liberty and the recognition of the advantages of 
competition in modern times have caused the government to 
abandon many forms of regulation which were common in 
ancient and mediaeval civilizations, but the complexity of modern 
capitalism and the abuses of freedom have necessitated the 
development of new kinds of government activity. 

The chief forms of modern government interference with 
private industry may be put under the four heads of action in 
behalf of consumers, of producers, of investors and of the com- 
munity in general. 

(i) In the middle ages the government interposed in behalf 
of the consumers either to guarantee good work or to insure 
reasonable price. Both of these forms of interference have 
disappeared in general industry to-day, because custom has 
been replaced by competition. The producer who gives short 
measure or turns out a defective product or charges an exor- 
bitant price cannot retain the trade in the face of competition. 
In modern times, accordingly, we find that the chief form of in- 
terference with competitive industry in behalf of the consumer 
is legislation to safeguard health, as in the case of food inspec- 
tion and quarantine regulation. In addition we have the cases 
where competition disappears, as in the actual monopolies 
mentioned in the preceding sections of this chapter and in the 
so-called trusts to be discussed in the following chapter, and 
where social control becomes requisite. Unregulated private 
monopoly is a menace to the consumer. 

(2) On the other hand, the interests of the laborer have 
been so materially affected by the advent of the factory sys- 



628 Socialism and Public Ownership [§ 235 

tern that modern interference on behalf of the producers is 
well-nigh exclusively limited to them. As we shall see in the 
succeeding chapters, there are five classes of such interference, 
all of which are rapidly becoming universal: (a) legislation to 
safeguard health, through the so-called factory laws, applicable 
to men, women and children alike; (b) legislation to ensure safety 
through employers' liability and compensation laws; (c) legisla- 
tion regulating maximum hours of work; (d) legislation fixing 
minimum wages; and finally (e) compulsory insurance against 
illness, old age or lack of employment. 

While the advisability of some particular application of this 
principle in a given country is naturally open to question, 
there is no longer any doubt, as we have learned in chap- 
ter xi, that such forms of interference are not necessarily 
incompatible with the highest ideal of liberty, in the positive 
and social sense. Experience alone can disclose the line be- 
yond which such legislation may imperil business enterprise 
and thus injure the prospects of the laborer himself. To the 
social economist, however, who remembers that the objective 
is man in relation to wealth rather than wealth in relation to 
man, the prosperity of a so-called successful business which 
rests upon a degraded and miserable labor force is illusory and 
not really worth having. 

(3) In former times the striking example of interference 
by government in case of investment was in behalf of the 
borrower. The usury laws, designed to protect the unfortunate 
debtor, have, as we know (§ 170), been rendered almost com- 
pletely unnecessary through the growth of competition in the 
loan of capital. This same development has, however, brought 
about the need of intervention of the opposite kind. To-day 
it is the lender or investor in corporate enterprise, and not the 
borrower, who requires protection. Nowadays it is rare to find 
any one who is not a depositor in a savings bank, a policy holder 
in an insurance company, a stockholder in a railroad or other 
corporation, or the possessor of a bank note or a bank account. 



§ 236] Bounties and Subsidies 629 

So wide and intricate are the ramifications of modern credit 
and finance that investors or creditors are obHged to rely more 
or less implicitly on the representations and good faith of the 
managers of these enterprises. Sad experience, however, has 
shown that the conception of real trusteeship among those 
entrusted with the funds of others is by no means so sacred 
as it ought to be; and government has been obliged every- 
where to take precautions to define and to enforce responsi- 
bility. Here, again, there are dangers on both sides, the risk 
of over-rigidity which may hamper legitimate enterprise, and 
the danger of lax accountability which may destroy confidence. 
That, however, some solid measure of regulation is requisite 
can no longer be successfully disputed. 

236. Bounties and Subsidies 

We come, finally, to the case of government interference in 
behalf of the general interests of the community. This takes 
the form of protection, which has already been discussed in 
chapter xxxii, and also of bounties and subsidies. 

The danger of such intervention is that particular interests 
may foist themselves upon the legislator in the guise of general 
interests. Bounties may be classified as (a) military bounties, 
(b) forest bounties, (c) agricultural and industrial bounties, and 
(d) land transport and shipping subsidies. The first two are not 
primarily economic in character and may be passed by. Agri- 
cultural and industrial bounties were frequent in former cen- 
turies, but disappeared in the main with the downfall of the 
mercantile system. The chief modern example is that of beet 
sugar in Europe, and it is so instructive as to merit some attention. 

The continental blockade under Napoleon put a stop to the 
colonial trade in cane sugar and gave an impetus to the culture 
of beets. After peace was established the beet-sugar industry 
was strong enough to claim and to receive encouragement in 
France, and the movement spread somewhat later in other 
continental countries. Cane sugar was shut out, and as the 



630 Socialism and Public Ownership [§ 236 

yield of beet sugar now exceeded the domestic demand, it be- 
came necessary to secure a foreign market. This was accom- 
plished by exempting sugar for export from the internal excise 
tax imposed for revenue purposes, or by a drawback. The 
drawback was frequently greater than the excise tax, and thus 
was to all intents a concealed bounty. Other countries even 
granted direct bounties on export. 

The effect of this legislation was to confine the market of 
each country to domestic sugar, to raise prices greatly at home, 
to diminish domestic consumption, to provide a large surplus 
for export, to lower prices on the world market enormously, 
and ultimately to cause a serious financial loss to each bounty- 
granting country. While the cane sugar production qf the 
world increased from 1,200,000 long tons in 1853-1854 to 
4,300,000 tons in 1 903-1 904, that of beet sugar rose from 
200,000 tons in 1853-1854 to 6,700,000 tons in 1901-1902. 
In the half-century the proportion of beet sugar rose from 
14 to 58 per cent of the total output of sugar. 

The system of sugar bounties gave Great Britain cheap 
sugar and made British jams and preserves world-famous; but 
it ruined the West Indies, brought a^out the Cuban war, and 
was continually more burdensome to the European continent. 
After several unsuccessful attempts the Brussels convention of 
1903, participated in by the chief European countries except 
Russia, abolished all bounties and excessive drawbacks as well 
as all discrimination, beyond a certain moderate point, in the 
domestic market against foreign sugar. Expenses thereupon 
decreased to such an extent that many countries also lowered 
their excise taxes. As a consequence domestic prices fell, 
export prices rose, beet sugar became more profitable and 
government expenses were reduced. 

The history of sugar bounties is an excellent illustration of 
the danger and ultimate inefficacy of agricultural or industrial 
bounties on a large scale. It is for this reason that such boun- 
ties are now extremely rare. In the United States the only recent 



§236] Bounties and Subsidies 631 

examples are the bounty on sugar, which was granted during 
the early nineties for the four years that foreign sugar was 
imported duty free, and the insignificant bounties for beet sugar 
granted by a few of the Western states. 

Shipping subsidies, on the other hand, are still a topic of 
active discussion. The experience of the United States with 
its subsidies to the Collins and Pacific Mail lines during the 
two decades from 1845 to 1867 was so unsatisfactory that the 
system was abandoned. More recently, however, subsidies 
not only in the shape of postal subsidies but also for tonnage, 
and in some cases even for construction, have been inaugu- 
rated by Great Britain, Germany, France, Japan and other 
countries. In the United States they were, until the Great War, 
limited to postal subsidies. The argument for shipping sub- 
sidies is akin to that for protection in general, which has already 
received attention. The situation since the close of the war 
in 1 9 18, with the prodigious output of vessels by the govern- 
ment, is of course very different from that of the preceding period. 
But before such subsidies are granted on any considerable scale 
it must be shown that a large merchant marine is not likely to 
develop of itself, that the aid conferred by government will 
really stimulate the efficient rather than shelter the inefficient 
and that the subsidies will not be confined to a few favored 
enterprises. 



CHAPTER XXXVI 

THE CONTROL OF TRUSTS 

237. References 

W. S. Stevens, Industrial Combinations and Trusts (1913) and Unfair 
Competition (1917); J. W. Jenks, The Trust Problem (1917); J. B. Clark, 
Control of Trusts (191 2); C. R. van Hise, Concentration and Control 
(1912); Bruce Wyman, Control of the Market (191 1); W. J. Brown, 
The Prevention and Control of Monopolies (1914); O. W. Knauth, The 
Policy of the U. S. towards Industrial Monopoly (1914); A. S. Dewing, 
Corporate Promotions and Reorganizations (1914); F. Walker, The Law 
concerning Monopolistic Combinations in Continental Europe (Polit. 
Science Quarterly, vol. xx, 1905). 

238. The Causes of Trusts 

We have learned in a previous chapter that what are popularly 
called trusts are simply combinations of capital in huge corpora- 
tions or holding companies. We have also learned that this 
world-wide movement toward consolidation responds in large 
part to the increased efficiency and economy of production. 
As it was previously intimated, however, it would be a mistake 
to ascribe the development of trusts in the United States en- 
tirely to this cause. In fact, many of the largest combinations 
have succeeded through different methods, which may be 
summed up under the term unfair competition. 

Unfair competition is indeed not confined to trusts. The 
opportunities, however, of indulging in these practices, repro- 
bated by the higher business ethics of to-day, are multiplied in 
the case of combinations. The chief forms of this unfair com- 
petition are the following: 

(i) The formation of bogus independent companies, designed 
to deceive the public. 

632 



§238] The Causes of Trusts 633 

(2) The reduction of local prices for the time being and often 
below cost, in order to drive the competitor out of business, 
with a resulting increase of price as soon as the object has been 
accomplished. Midway between (i) and (2) and partaking 
of the characteristics of each is 

(3) The utilization of special devices like "fighting brands" 
or "fighting ships." 

(4) The use of certain articles as a condition of the use of 
other articles that are needed. This practice, based on what 
are often called "tieing clauses," because the use of one is tied 
up with that of another, is found especially in the case of expired 
patents. 

(5) The acquisition of new devices for the sake not of utiliza- 
tion, but of withholding them from rivals. 

(6) The employment of secret agents, spies or detectives. 

(7) The exchange of customers' lists, sometimes called "yes 
and no" lists, with an agreement to refuse to sell to those who 
deal directly with consumers. A modification of this is the 
classification of customers in order to avoid "scalping" and to 
provide that the wholesale dealers should sell only to certain 
specified retail agents. 

(8) The production of defective and low-priced articles, as 
in the case of the "knockers," so called because designed to 
knock out competing articles. 

(9) Factors' agreements, and similar exclusive arrangements, 
whereby supplies are withheld from dealers who accept rival 
commodities. 

An added advantage has in the past often been secured through 
railway rebates. These, however, are now much less frequent 
than formerly. The influence of the tariff must also not be over- 
looked. Mr. Havemeyer of the Sugar Trust went so far as 
to state that "the tariff is the mother of trusts." In that bald 
form, of course, the statement involves an exaggeration, for not 
only are there trusts which derive no benefit from the tariff, 
but we find similar combinations in European countries where 



634 The Control of Trusts [§ 239 

protective duties are lower or even non-existent. There is, 
however, little doubt that an exaggerated duty, by enabling an 
industrial combination to maintain its prices at a relatively high 
level, may augment the advantages enjoyed by a trust already 
in possession of the field, even though the benefit of these in- 
creased prices would ordinarily accrue also to the independent 
competitors. 

The causes of trusts, therefore, may be declared to be various. 
Their object is to secure larger profits, and to the producer it 
is immaterial whether these profits are attained by efficiency 
and economy, or by unfair competition. That both causes have 
influenced the development of trusts is reasonably certain. 
From the point of view of the general welfare, the greatest bene- 
fits will obviously accrue by eliminating as far as possible the 
latter and giving the freest possible scope to the former. 

239. The Effects of Trusts 

• 

The effects of combination may be regarded from the five- 
fold standpoint of the owner, the wage-earner, the independent 
producer, the purveyor of the raw material and the consumer. 

(i) The owner in modern times is the corporate investor. 
So far as the problem is one of general corporate profits depend- 
ing on the ordinary mutations of business, or affected by the 
capitalization of the enterprise, it has already been touched 
upon in a preceding chapter. The surest protection of the in- 
nocent investor is to be sought, as we have seen, through the 
avenue of publicity and of the responsibility imposed upon 
corporate trustees. 

(2) The influence of industrial combination upon the wage- 
earner is to accentuate the general effect of capital upon wages. 
This has already been studied. So far as the prosperity of the 
laborers is bound up with the productivity of the enterprise, the 
industrial combination which tends toward greater stability and 
enlarged productivity may work toward an improvement in 
their condition. To this may be opposed the consideration 



§ 2391 The Effects of Trusts 635 

that the mere fact of concentration may enable the enterprise 
to present a more solid and effectual front to the demands of 
the trades-unions. Thus the earlier indifference of the Amer- 
ican Federation of Labor to the Steel Trust or the American 
Tobacco Company soon changed into open antagonism. On 
the other hand, the dangers of a strike are multiplied when it 
extends through all the ramifications of a vast trust. Finally, 
the far-sighted heads of a great combination are apt to take a 
broader view of the labor problem, and to seek industrial peace 
by wise concessions and a policy of making the worker realize 
that his interests are in a large sense bound up with those of 
the combination. Yet when the combination becomes a monop- 
oly, there is, as we have seen (§ 177), a real and insidious lurking 
danger in its ultimate effects upon wages. 

(3) The independent producer is undoubtedly assailed by 
the combination. We must, however, distinguish between the 
legitimate and illegitimate, the natural and unnatural effects of 
combination. Where the combination wins its way by better 
service to the public, the disappearance of the inefficient small 
competitor may be as advantageous to the community as was 
the substitution of the factory for the sweat-shop or the railway 
for the coach. Even for the individual himself, as long as he 
is not pre-eminently capable, it may often be better to be an 
official of a huge enterprise on a fairly secure salary and with 
prospect of advance than an independent producer continually 
on the fringe of defeat, in much the same way as the ''inde- 
pendent" hand-loom weavers in England and America were 
glad to join the ranks of the factory operatives. To rid the 
community of the inefficient producer and to convert him into 
a useful agent may be the beneficial result of combination. 

This, however, presupposes that the way is kept open for 
the efficient. In other words, a combination must not be per- 
mitted to become a monopoly except in those quasi-public 
enterprises where competition is itself undesirable. It is here 
that the greatest difficulty arises. The dangers of cut-throat 



636 The Control of Trusts [§ 239 

competition are undeniable; but in the main, fair competition 
between honest rivals eliminates the inefficient and perpetuates 
the capable. Competition, indeed, need not be actual; potential 
competition may serve equally well as a check to the dangers 
of monopoly. Nor does the persistence of competition neces- 
sarily mean the continuance of the small producer; the competi- 
tion may be one between large units. The objective is the 
elimination not necessarily of the combination but of the monop- 
oly. If the trust is not allowed to become a monopoly, it may 
still be subjected to actual or to potential competition. 

(4) So far as the purveyor of raw material is concerned, 
much is supposed to depend upon the precentage of the output 
taken by the combination. Where the business is only one 
degree removed from the raw material of nature, and especially 
where the supply of this material is restricted, the tendency 
to concentrate the ownership of the raw material becomes 
very strong. It is significant that most of the largest combina- 
tions on the list in page 348 have grown out of an ownership 
of raw material which is not annually reproducible, like iron 
ore, copper and lead. In several cases, however, like oil, to- 
bacco, sugar and beef, the combination does not own the raw 
material, because it is the result of annual production at once 
too minute and too widespread for concentration. In these 
and similar cases the complaint is often heard that the trust 
keeps down the price of the raw material by reducing its offer 
to the lowest limit. While there undoubtedly is some founda- 
tion for this charge, as especially in the recent history of the 
Beef Trust and of the Standard Oil Trust in Kansas, it is proba- 
ble that the statements are frequently exaggerated. For in 
some cases, as in tobacco and sugar, the market is an inter- 
national one, and even if the combination forms so large a part 
of the international demand as to control the price, the restric- 
tion of the offer below the cost of the marginal producer would 
have the effect of reducing the supply and thus ultimately lead- 
ing to an increased price. As long as the total demand for the 



§ 239] The Effects of Trusts 637 

raw material suffers no appreciable change, it is questionable 
whether the concentration of demand into a few hands is apt to 
have a permanent effect on the producer of the raw material. 
Nevertheless the temporary consequences may be burdensome 
and injurious. 

(5) Finally, the combination influences the consumer, either 
favorably or unfavorably. A favorable effect is the tendency to 
steady prices. Unrestricted competition is always attended 
with sudden and extreme oscillations of prices according to 
market conditions, as influenced by the hopes and fears of com- 
petitors. A large combination is often in a better position to 
refrain from either cutting or inflating prices. After the forma- 
tion of the railway pools a generation ago the range of variation 
in the New York-Chicago rates was materially reduced. So 
also the United States Steel Corporation has exerted a markedly 
steadying influence on prices since its formation. The larger 
the combination, the greater the possibility of this influence. 

The other side of the problem is not so favorable. The 
advantage of combination may be lower cost, but the object of 
combination is higher profits. 

It does not necessarily follow that higher profits mean, as 
is usually supposed, actually higher prices. If the demand 
can be stimulated by a reduction of prices, higher profits are 
compatible with greater sales at lower prices. There is in 
every industry, competitive or monopolistic, an obvious limit 
to high price, caused by the possible substitution of some 
lower-priced equivalent. This commodity competition is 
omnipresent. The real problem, however, is whether in those 
combinations which produce so large a share of the output as 
effectually to <?ontrol the market, the "trust" price is higher 
than would be the competitive price. A careful investigation 
into some of the leading combinations by the Industrial Com- 
mission disclosed the fact that during selected periods when 
the combinations were actually in control, the "differential" 
gr margin between the price of the raw material and of the 



638 The Control of Trusts [§240 

finished product had risen, even though the actual selling price 
might have declined. 

The conclusion therefore seems to be that we must distinguish 
between the effects of combination and those of monopoly. 
In so far as the trust can be shorn of monopolistic features it 
will disclose all the advantages of combination. In so far as the 
trend is toward monopoly, the evils of the situation will pre- 
ponderate. Up to the present time we have had both the ad- 
vantages and the evils. 

There remains, however, one further consideration. Is the 
mere fact of bigness itself to be deprecated? It is sometimes 
stated that the industrial ideal is competition between small 
units, and that the mere size of large combinations is a menace, 
both because the limits of efficiency may have been overstepped 
and because the massing of immense capital in a single hand 
is in itself dangerous. It would seem, however, that these 
statements are exaggerated. The point at which the increased 
efficiency disappears is generally one which would render 
possible the existence of very large combinations; and the 
possible menace from great aggregations of capital tends to be 
removed by the assumption of the corporate form, whereby 
individual ownership in the enterprise may be widely distrib- 
uted. The modern age, with its international business scope 
has become one of large ventures; and it is hopeless to expect 
the wheel of progress to reverse itself. Combination of capital 
is inevitable; monopoly may be averted. 

240. The Prohibition of Trusts 

The first attempt of the American government to deal with 
trusts was to prohibit them. From the end of the eighties of 
the last century most of the states vied with each other in 
stringent prohibitions; but the laws were without exception 
futile. National legislation, on the other hand, took the form 
of the Sherman Act of 1890. This provided that: 

"Every contract, combination in the form of trust or other- 



§ 24o] The Prohibition of Trusts 639 

wise, or conspiracy in restraint of trade or commerce among 
the several states or with foreign nations is hereby declared to 
be illegal. . . . Every person who shall monopolize or attempt 
to monopolize or combine or conspire with any other person 
or persons to monopolize any part of the trade or commerce 
among the several states or with foreign nations shall be 
deemed guilty of a misdemeanor." 

In the Knight case, decided in 1895, the American Sugar 
Refining Company was held to be not subject to the law. Two 
years later, however, it was decided in the Trans-Missouri 
Freight Association case — a decision reinforced in the Joint 
Traffic Association case in 1898, that combinations are illegal, 
even if reasonable in themselves. In 1899 the Addyston Pipe 
and Steel Company case was distinguished from the Knight 
case and the pooling agreement was declared to be illegal. 
Finally, in the Northern Securities Company case in 1904, it 
was held that the Sherman Act embraced all direct restraints 
of any kind, and that the projected combination of two com- 
peting railroads was illegal. 

A determined effort was now made to apply the Sherman Act 
to industry in general. When the suits instituted against the 
Standard Oil and the Tobacco trusts were finally decided, in 
191 1, the Supreme Court showed that it had made considerable 
progress in its appreciation of the economic principles involved. 
The Standard Oil case virtually held that the Sherman Act was 
meant to prohibit only unreasonable or undue restraints of 
trade. The Tobacco case held further that the test of illegality 
is whether the transaction in question represents a purpose to 
monopolize. The mere fact that direct competition comes to 
an end does not necessarily carry with it the purpose to acquire 
monopolistic control. 

Both cases decided that the test of legality is whether the 
combination lessens competition in such a way as may reason- 
ably be thought to injure either the consumer or the competitor. 
The test, in other words, is the character of the resulting injury. 



640 The Control of Trusts [§ 241 

The earlier cases had decided that any direct restraint of com- 
petition is illegal, irrespective of the effects on the outsiders. 
Under the new interpretation of the law, enterprises may increase 
their business to any extent, provided that they do so by proper 
methods and do not interfere with the rights of others to compete. 
What is now prohibited, in other words, is unfair competition, 
for this alone seems to disclose a purpose to acquire monopoly 
control. 

As a matter of fact, both the Standard Oil and the Tobacco 
companies were declared obnoxious to the law for this very 
reason. Serious doubts, however, may be expressed as to 
whether the dissolution of the combinations has really availed 
to reintroduce the active competition which it was the object of 
the law to maintain. Thus there has slowly grown up the 
conviction that what is needed is not so much the prohibition, 
as the regulation, of trusts. 

241. The Regulation of Trusts 

The idea of the regulation of trusts rests upon the principle 
that we must endeavor to preserve the good while eliminating 
the evil in modern combinations. It involves the creation of 
an administrative body of sufficiently broad character to exercise 
an efficient national supervision. What this should ultimately 
be is still undecided. There are at least four duties which may 
be delegated to such a body. 

(i) The securing of publicity — not that publicity which 
would disclose trade secrets and put an enterprise at the mercy 
of its competitors — but the financial publicity to which stock- 
holders are entitled, as well as the reasonable publicity in the 
management which is of importance to the public. The purpose 
of publicity is to permit a judgment as to profits as well as to 
the conditions under which the enterprise is conducted. With 
such publicity potential can more readily be converted into actual 
competition. 

(2) The prohibition of unfair competition. Railway rebates 



§ 24i] The Regulation of Trusts 641 

are now gradually being eliminated by the Interstate Commerce 
Commission. The restriction of the other practices described 
above (§ 238) is more difficult. But the mere existence of a 
commission invested with the duty of examining complaints 
will go far to remedy the situation. Whether the unfair practices 
should be specified in the law is questionable. Inasmuch as 
it is not easy, however, to frame a measure at once compre- 
hensive and exact, it seems preferable to allow a large degree 
of discretion to the commission. 

(3) Helping the courts to watch over the dissolution of such 
trusts as have actually become monopolies, when the monopo- 
listic practices are not discontinued. The courts have neither 
the time nor the technical knowledge needed to execute their 
own decrees. 

(4) Whether the commission should have the power to fix 
prices is doubtful. The difficulties of such a scheme are great. 
In the case of the single industry of the railways, almost the 
entire time of the Commission is occupied with deliberations as 
to particular charges. Yet the problem of fixing railway rates 
is simple compared with that of fixing prices in general. For 
in the great mass of commodities we have the continual changes 
in market conditions, due to alterations not only in the demand, 
but in supply. In the case of railways, fluctuations in supply 
are almost wholly absent. A rate once fixed may consequently 
be presumed to remain reasonable for a short time at least; 
whereas in ordinary commodities what is reasonable to-day 
may be unreasonable to-morrow. An adequate supervision 
of trust prices would therefore call for a detailed business knowl- 
edge of all the changing conditions of each trade by experts. 
We should need not one commission, but a separate commission 
for each line of business. 

Moreover, while it is to be expected that any comprehensive 
attempt to fix prices would probably be unsuccessful, it would 
in all likelihood be rendered unnecessary by the adoption of 
the provisions mentioned above. 
41 



642 The Control of Trusts [§ 241 

The final question is as to the character of the business to be 
subjected to regulation. Manifestly not all combinations are 
trusts. Inasmuch as the dangers arise chiefly in large combina- 
tions, only those of a certain size should be subject to regulation, 
and that too only when they control a certain proportion of the 
entire business. The exact figure must indeed be arbitrary. 
If the important fact in restraint of trade is the influence exerted 
upon prices, it may be that a concern with a 50 % control of the 
trade may exert more influence than another concern in a differ- 
ent industry with 90% of the trade. Since the control of the 
market does not stand in any exact relation to the proportionate 
amount of business, all that can be said is that if a combination 
controls from 40% to 50% of the entire business it becomes at 
least a legitimate object of suspicion. 

We see, then, that the real solution of the trust problem is 
regulation rather than prohibition. In Europe the governments 
have long since recognized the futility of prohibition and are 
now concerned chiefly with attempts at moderate control. 
The United States is just entering upon that field. For this is 
virtually the meaning of the so-called anti-trust laws of 1914, 
creating, a federal trade commission. If we are able to maintain 
conditions of equality in transportation, if we are able to secure 
a reasonable publicity in the formation and the conduct of the 
enterprise, and if finally we are able to eliminate unfair compe- 
tition, the community may expect in the large mass of private 
industry to reap the benefits of combination without suffering 
the burdens of monopoly. The pratical policy of the future 
must rest upon a detailed analysis of large business enterprises 
in the hope of ascertaining where combination is possible without 
monopoly and where, on the other hand, monopoly itself must 
be frankly recognized and held in check. 



CHAPTER XXXVII 
LABOR LEGISLATION 

242. References 

In General: Beatrice Webb, ed., The Case for the Factory Acts (igoi) ; 
S. & B. Webb, Problems of Modern Industry (1898) and The Prevention 
of Destitution (191 1); Hutchins and Harrison, History of Factory Legis- 
lation (191 1); G. G. Groat, Attitude of American Courts in Labor Cases 
(191 1); Commons and Andrews, Principles of Labor Legislation (1916); 
Preliminary Report of the New York Factory Investigating Commission, 
(3 vols. 191 2). 

Child Labor: O. J. Dunlop, English Apprenticeship and Child Labour 
(1912); F. Keeling, Child Labour in the United Kingdom (1914); George 
B. Mangold, Child Problems (1910); Child Labor Bulletin. 

Women's Labor: Josephine Goldmark, Fatigue and Efficiency (191 2); 
L. D. Brandeis and J. Goldmark, Summary of "Facts of Knowledge' ' 
submitted on Behalf of the People in support of its Brief on the Law, in 
People vs. Schweinler (1914); B. L. Hutchins, Women in Modern In- 
dustry (1915); E. J. Hutchinson, Women's Wages (1919). 

Industrial Hygiene: W. G. Thompson, Occupational Diseases 
(1914); Studies in Vocational Diseases by U. S. Public Health Service 
(191 6); P, S. Florence, Factory Statistics and Industrial Fatigue (1918). 

Hours of Labor: J. Rae, Eight Hours for Work (1894); Report of 
the U. S. Commission on Hours of Labor and Conditions of Employment 
in the Iron and Steel Industry in the U. S. (191 2); Frankfurter and Gold- 
mark, The Case for the Shorter Working Day (19 16). 

Minimum Wage: The Theory of the Minimum Wage (American 
Economic Ass'n, 1913); Irene O. Andrews, Minimum Wage Legislation 
(1914); R. H. Tawney, Studies in the Minimum Wage (1914-1916); 
L. D. Brandeis and J. Goldmark, Appendix to Briefs filed in the Case of 
Stettler vs. O'Hara (Ore.) (1914); M. B. Hammond, Judicial Interpreta- 
tion of the Minimum Wage in Australia (American Economic Review, 
vol. iii, 1913); E. F. McSweeney, The Case Against the Minimum Wage 
(1912); P. S. CoUier, Minimum Wage Legislation in Australia (1915). 

243. The Employment of Children and Women 

Legislation in behalf of the laborer has assumed three principal 
forms, dealing respectively with the conditions of employment, 
the conditions of remuneration, and the results of employment. 

643 



644 Labor Legislation [§ 243 

The chief abuses in the conditions of employment first dis- 
closed themselves in the factories. The enactments designed 
to deal with these abuses were hence called factory laws. It 
was not long, however, before the provisions of the laws were 
extended to other occupations than those conducted in technical 
factories. But the name persisted. 

The earliest form of factory legislation was the prohibition of 
child labor. Children of tender age must be protected not 
only against the unprincipled employer but against the greedy 
or necessitous parent. The argument is biological and social as 
well as economic. To permit child labor is to stunt body and 
mind, to breed ignorance and immorality, to foster a progressive 
deterioration of the working population. The claim that the 
earnings of the children are needed for the family support is 
dispelled by the well authenticated fact that when the father is 
the sole wage earner his income tends to equal the previous 
earnings of the entire family. 

England as the original home of the factory system led the 
way in factory legislation. The conditions before the law of 
1802 were distressing. The factories were filled with pauper 
children of the tenderest age lodged in rough and dirty barracks, 
driven by hard task-masters, sometimes for fourteen hours a 
day, under conditions that beggar description, and receiving 
food of the most disgraceful character. The law of 1802 applied 
only to pauper children, received as apprentices in cotton and 
woollen mills. In 181 9 the law was applied to all young children 
in cotton mills. In 1825 and 183 1 the age limit was raised; 
and in 1833 the law was extended to other textile industries. 
Thus from decade to decade, the age limit was increased and 
the scope of the law extended until at present in England, as 
well as in many other European countries, the child may be 
said to be, in large measure, emancipated from industry. 

In the United States the movement began much later, and 
although the abuses were never quite so glaring as Europe, they 
were, and still are, sufficiently great to demand attention. In 



§ 243] Children and Women 645 

New York, child labor is now regulated by the compulsory 
school law which prohibits employment of children under 14 
during the school term; by the factory law, which forbids child 
work under 14, limits it to eight hours a day between the ages 
of 14 and 16, and protects children from overtime; by the 
mercantile law which extends substantially the same provisions 
to all commercial employments; and by the street trades law 
which applies to newspaper vendors. In the country at large, 
during the past few years, great progress has taken place along 
the following lines: (i) The 14-year age limit below which 
children are not to be employed, has been extended to continually 
new occupations; (2) work during school term or school day has 
been prohibited; (3) hours of labor for minors between 14 and 
16, or in some cases between 14 and 18 years, have been limite-d 
to eight; (4) night work for minors has been prohibited in 
whole or in part; (5) compulsory education laws have been 
extended and better methods of proving the age of children 
seeking employment have been introduced. 

The above program, however, has by no means been accepted 
everywhere. The slowness of the development in some sections 
led to the passage^ in 19 16, of the Federal Child Labor Law 
which prohibited any business employing children under six- 
teen from engaging in interstate commerce. When this was de- 
clared unconstitutional, it was replaced in 19 19 by the law 
imposing a 10% tax on the employment of such child labor. 

The second stage was the application of the law to women's 
work. In the English coal mines, during the early part of the 
nineteenth century, women, used in the place of mules to haul 
the trucks in the galleries, were compelled to go naked and on 
all fours, never coming to the surface and often bearing their 
children below ground. The English laws, which were first 
applied to women in mines and in textile factories in 1841 and 
1844 were opposed until almost the middle of the nineteenth 
century as an interference with the "freedom of contract." In 
the United States, where the legislation began much later, the 



646 Labor Legislation [§ 244 

same objection was long successfully urged. The last few years, 
however, have seen a great change. In 1908 the ten-hour law 
of Oregon and in 191 5 the eight-hour law of California were up- 
held. The movement for the protection of women in industry is 
accordingly now taking four forms: limitation of hours of work; 
prohibition of night work; provision of special conveniences; 
and protection to childbirth. 

By 1919 the limit of hours of work had been reduced to 9 
in twelve states, and to 8 in six states. In most of the older 
states the limit was still 10 hours a day, or 52 to 54 a week. 
In only seven states was there no legal regulation of hours of 
work at all. 

In Europe, following a conference on the subject in 1906, an 
agreement to prohibit night work was signed by fourteen coun- 
tries. The movement is now rapidly spreading in the United 
States. The last few years have also seen improvement in the 
conveniences required for women workers, such as seats, ade- 
quate dressing rooms and the like. The latest form of protec- 
tion is that of the treatment of women shortly before or after 
childbirth. Italy led the way several years ago with an en- 
forced rest period; and some countries, like England and Ger- 
many, even provide a method of insurance for this enforced 
vacation. In the United States, Massachusetts made a be- 
ginning with a law of 191 1, prohibiting the employment of 
women for two weeks before, or four weeks after, childbirth. 
New York followed in 191 2 and Connecticut and Vermont in 
1 9 13 with somewhat similar laws. The benefits of such restric- 
tions from both the medical and the larger social point of view are 
so obvious as to require little discussion. 



244. The Protection of Life, Health, and Comfort 

The recognition of the legitimacy of factory laws applicable 
to men came much later. The actual legislation either deals 
with the protection of life, health, and comfort, or regulates 



§ 244] Protection of Health 647 

the hours of labor. Under the former head are to be classed the 
laws regarding: (i) accidents; (2) fire; (3) sanitation and 
ventilation; (4) occupational disease; (5) especially hazardous 
industries; and (6) home work and sweatshops. 

After the early appalling experience of the ease with which 
operatives were maimed, governments intervened to require 
elaborate precautions and safety appliances. Such provisions 
are now common, although not uniformly enforced. 

From the protection against accident to that against fire is 
only a step. The need of such protection in the United States 
is greater than abroad, owing to the more extended use of 
wood in building construction. The Triangle fire in New York 
in 191 2 led there and elsewhere to the adoption of far more 
stringent protective legislation. 

The protection of life was soon followed by that of health. 
The advance of medical knowledge and the increasing realization 
of the dangers of unsanitary conditions have led to the elabora- 
tion of the new discipline of industrial hygiene, the teachings of 
which are gradually being enforced in laws that lay down mini- 
mum requirements as to the character of light, amount of 
ventilation, and cubic feet of air necessary for each employee. 

Still further advances have been made in the treatment of 
occupational disease. Europe has long since been paying 
especial attention to the "poisonous trades"; in the United 
States the movement has only just begun. The first national 
conference on industrial diseases was held in 19 10, and a recent 
memorial to the federal government declares that at least 25% 
of such disease may be readily eliminated. Occupational 
diseases are due to the following factors: (i) harmful substances, 
such as metal poisons, toxic fluids, toxic or irritant juices, organic 
germs and miscellaneous irritants; (2) harmful conditions of 
physical environment, such as hazards from air pressure, hu- 
midity, temperature, or light; (3) injuries to nerves, muscles, 
and bones; (4) injuries to special organs, like the skin, eyes, 
ears, nose, and throat.* In 191 1 several states, New York 



648 Labor Legislation [§ 245 

among them, initiated legislation requiring the annual report- 
ing of accidents in such occupations. In 191 2, the national 
government put an end to phossy jaw," by imposing a prohibi- 
tive tax on the manufacture of poisonous phosphorus matches. 
The first state legislation of a similar character was that of 19 13 
in Pennsylvania, Ohio and Mississippi. By 191 6 there were 
no less than sixteen states which had enacted legislation de- 
signed to protect the workers against infectious or occupational 
disease. 

Closely related to the poisonous trades are the peculiarly 
hazardous occupations. Almost all American states in which 
there are coal or other mines have enacted special laws pro- 
viding for rescue cars, emergency rooms, machine drills, the regu- 
lation of the quality of illuminants and the handhng of powder. 
Even more widespread are the laws affecting railway transporta- 
tion, with detailed provision for safety couplers, air brakes, etc. 
Similar legislation has also now become common in the building 
and the electric trades, and in the construction of tunnels, 
caissons, etc. 

Still more recent is the application of factory legislation to 
home work or sweatshops, especially in the so-called parasitic 
trades. Here, as in Massachusetts and New York, a license is 
now required for the manufacture of articles like clothing, 
artificial flowers and cigars, in the home. It is an attempt to 
make domestic workshops amenable to factory restrictions. 

245. The Regulation of the Hours of Labor 

The second category of laws dealing with general conditions 
of employment affects the hours of labor. Such laws either pro- 
vide for a periodical day of rest or restrict work on weekdays. 

The first point is that of Sunday labor. There are, indeed, 
certain occupations which must be carried on every day in order 
to provide the necessities of life. The gradual weakening of the 
religious prohibitions and the increasing complexity of modern 
social conditions have cooperated to bre^k down the old colonial 



§ 245] Regulation of Hours of Labor 649 

"blue" laws. But the obvious need of intermission from 
continuous work is now recognized and the new one-day-rest- 
in-seven laws, based on economic rather than on religious con- 
siderations, now provide that Sunday workers must receive a 
holiday during the week. 

The matter has been complicated by the development of in- 
dustries where continuous labor is needed, not to supply the 
daily wants of the consumer but to prevent the losses which 
would ensue upon a periodical shutting down of the machinery. 
A recent government report, for instance, has pointed out that 
in 1910 of 173,000 employes in the blast furnaces and steel 
mills and rolling works, 50,000 or 29% worked seven days in 
the week and 20% worked 84 or more hours per week, that is, 
at least 12 hours a day, including Sundays, and that in Massa- 
chusetts at least 222,000 individuals were engaged in seven days' 
labor. In 192 1 the situation was not much better. The chief 
industries in which such labor is now found are the metal and the 
public-service industries. 

American legislation on the subject is here also in its infancy. 
In 1 9 13 New York and Massachusetts provided that all em- 
ployees ill factories and mercantile establishments must be 
given at least 24 hours' consecutive rest in seven days, although 
the New York law was weakened in 19 14 by granting the Com- 
missioner of Labor the privilege of exempting employees in neces- 
sarily continuous industries which have the eight-hour day. 

The other form of labor time legislation restricts the hours 
of daily toil. Here, as in the case of female labor laws, the 
courts at first clung to the freedom-of-contract theory. In 
1898, however, the Supreme Court upheld the Utah law estab- 
lishing the eight-hour day in mines and smelters; and about a' 
decade later the federal law affecting the hours of labor on inter- 
state railways was declared valid. In 191 1 Georgia enacted a 
ten-hour law applicable to textile factories. In 191 2 Massa- 
chusetts applied the principle to conductors and motormen and 
New Jersey to bakeshops; in 1913 Mississippi and in 19 14 Ore- 



650 Labor Legislation [§ 246 

gon applied the principle to all factories and mercantile 
establishments. 

In the case of public-service corporations, many countries 
have gone further by creating the eight-hour day as the maxi- 
mum limit. This applies not alone to government employees 
but to ship-building and army-supply industries which manu- 
facture directly for the government. In the United States the 
eight-hour day has long been enforced in the national as well as 
in many state and city governments; but it was applied for the 
first time to public-service corporations in a somewhat modified 
form by the federal eight-hour railroad service act of 191 6. Not 
a few private industries, both here and abroad, have voluntarily 
adopted the eight-hour system and have found it profitable. 

246. The Minimum "Wage 

The second phase of labor legislation mentioned on page 643, 
concerns the conditions of remuneration. These fall under four 
heads: (i) The contract of employment; (2) strikes and boy- 
cotts; (3) the truck system; and (4) the minimum wage. 

Of these the first is of relatively minor importance and the 
second has been touched on above. The truck or company 
store system, however, has from the beginning been a glaring 
abuse. Large employers have frequently provided stores at 
which nearly everything needed by the workman could be 
purchased. Before long, however, wages were paid in scrip or 
tickets on the stores, instead of in cash; the quality of the 
goods depreciated; and the temptation to overcharge was often 
irresistible. So notorious did the abuses become that the 
stores earned the name of "pluck me" stores, and often proved 
to be an insidious way of nibbling at wages. Anti- truck laws as 
a consequence were enacted at an early period in England and 
are now found in many of the American states; but the abuse 
itself has by no means entirely disappeared. 

The most recent legislation deals with the minimum wage. 
In the middle ages the attempt was to regulate maximum wages 
in the interest of the employer; the modern endeavor is to 



§ 246] The Minimum Wage 651 

regulate minimum wages in the interest of the employee. The 
need of such regulation has made itself felt in three classes of 
trades: the so-called parasitic trades, the immigrant trades, 
and the department stores. The parasitic trades are found 
chiefly in the case of home workers, where the work is so simple 
that almost anyone, including children, can be employed. In 
the complete absence of labor organization, the conditions are 
such as to enable sub-contractors to play individual against 
individual and to beat wages down to the starvation or sweat- 
shop level. 

Many of these trades are recruited in the United States by 
immigrants; but immigrants, unaccustomed to the prevalent 
standard of living and willing to take only a little more 
than what they received at home, are found in many other 
occupations. Finally, in department stores, wages are often 
exceedingly low because they constitute only a partial support 
of some of the workers, because the position of the girls who 
look forward to marriage is often regarded as temporary, and 
because there is always a relative oversupply of applicants for 
positions requiring little or no training. 

The result is that we find large sections where the wages are 
wofully inadequate, and where the minimum wage is not far 
different from the living wage. A good definition is that given 
by Justice Higgins of the Australian court, as "the wage 
necessary to satisfy the normal needs of the average employee 
regarded as a human being, living in a civilized community." 

Minimum-wage legislation was initiated in Australasia. New 
Zealand began in 1894, making it part of a movement to prevent 
^strikes through the compulsory arbitration court. Victoria 
started a different method in 1896, when it created a system of 
wages board through the compulsory cooperation of the employer 
and the employee, — a system followed by South Australia in 
1900, Queensland in 1908, and Tasmania in 1910. The New 
Zealand system of compulsory arbitration was adopted by New 
South Wales in 1901, West Australia in 1902, and the Australian, 



652 Labor Legislation [§ 246 

Commonwealth in 1904. New South Wales, however, added 
the system of wages boards in 1908, and New Zealand introduced 
conciliation councils in the same year. On the other hand, 
Victoria added a court of industrial appeal in 1903 and South 
Australia in 1907. 

In England provision was made in 1909 for the erection of 
trade boards and district trade committees, empowered to 
prescribe a minimum wage in four occupations: the readymade 
and wholesale-bespoke tailoring, paper-box making, machine- 
made lace and net finishing, and certain kinds of chain making. 
In 191 2 a similar system was introduced into the coal mines of 
England and Wales and in 1913 four more occupations were 
added. In the United States the first minimum-wage law was 
that of Massachusetts in 191 2. This did not provide a com- 
pulsory enforcement of the award of the trade boards, limiting 
itself to the privilege, under certain conditions, of publish- 
ing the names of the offending employers. The movement 
now spread rapidly, especially after the Oregon law had been 
upheld, and by 1919 fifteen states had adopted minimum-wage 
legislation of a compulsory nature. The administrative autho- 
rities are known as trade boards, state wage boards or indus- 
trial welfare commissions and in a few cases, the act itself 
fixes a classified minimum-wage scale. American legislation, 
however, in contradistinction to that of England and Aus- 
tralasia, applies thus far only to women and children, although 
in some cases the law includes minors up to 21. There is, 
every prospect that the next few years will see a great extension 
of the system. 

The arguments for a minimum wage are not materially differ- 
ent from those in behalf of the other forms of labor legislation. 
If it is legitimate to defend a minimum standard in respect to 
protection against accidents, and to the hours of labor, it is 
difficult to see why the arguments do not apply to the remunera- 
tion for labor; for to work for wages below a necessary minimum 
is at least equally hazardous to health and to efficiency. The 



§246] The Minimum Wage 653 

arguments advanced against the minimum wage are the follow 
ing: (i) the industry cannot afford to pay the increased wage. 
The answer is: first, that, as experience has shown, an increase 
of wage, especially in the parasitic trades, often leads to an 
increase of efhciency; and secondly, that if the industry is not 
able to pay living wages, it is better to replace it by one in which 
the natural advantages will render this possible. (2) The 
danger is that all wages will be leveled down to the minimum, 
so that the minimum will tend to become the average wage. 
This is the same argument formerly advanced against the trade 
unions (§ 180); but it is borne out by neither theory nor experi- 
ence. (3) The implication is that the government must provide 
work at the given wage as well as wages for a given work. The 
answer here is that there is no more implied obligation on the 
government to provide work when it fixes a minimum wage than 
when it restricts the hours of labor or enacts laws affecting 
industrial hygiene. The law simply states that if the employer 
carries on the industry he shall do so under certain conditions. 
(4) The law is difficult of enforcement. This may readily be 
granted without, however, impugning the necessity of the law. 
The correct conclusion to be drawn is the need of adopting the 
best administrative methods. (5) The danger of interstate 
competition will render all such state laws nugatory. This 
objection may also be conceded in part; but to the extent that 
it holds good it follows that we shall ultimately have to come to 
federal regulation. (6) A compulsory minimum will mean a 
virtual gratuity to the unemployable. This, however, is really 
an advantage; for if the law will lead to a sifting out of those 
who do not want or are not able to work, the public will be in 
a better position to deal with the problem of unemployment. 

The short experience with the minimum wage tends to show 
the following advantages of the system: (i) A distinction is 
made between the unemployed and unemployable; (2) the 
field of competition between the workers is restricted and the 
fluctuations not only in earnings but in production are some- 



654 Labor Legislation [§ 246 

what checked; (3) an impetus is given to the formation of labor 
unions among the hitherto unorganized and weaker laborers; 
(4) the increased wages have been met partly by an increase in 
the quantity or quality of the output, partly by a reduction in 
profits, and partly by an advance in price. There is every 
reason to believe, therefore, that the movement initiated in 
Australasia and subsequently adopted in Great Britain will 
spread rapidly in the United States and on the European 
continent. 



CHAPTER XXXVIII 
SOCIAL INSURANCE 

247. References 

In General: I. M. Rubinow, Social Insurance (1913); H. R. Seager, 
Social Insurance (1910); Frankel & Dawson, Workingmen's Itzsura^tce 
in Europe (191 1); S. & B. Webb, The Prevention of Destitution (191 1); 
Workingmen's Insurance in Europe, U. S. Bureau of Labor, 2 vols. 
(191 1); W. H. Dawson, Social Insurance in Germany (191 2). 

Accident Insurance: Crystal Eastman, Work Accidents and the 
Law (1910); Schwedtman & Emery, Accident Prevention and Relief 
(191 1); Report of the New York Commission to Inquire into the Question 
of Employers' Liability (191 1). 

Health Insurance: T. Smith, Everybody's Guide to the National 
Insurance Act (191 2); Carr, Garnett and Taylor, National Insurance 
(1914); Sir. J. Collie, Malingering and Feigned Sickness (1913); Am. 
Labor Legislation Ass'n, Brief for Health Insurance (1916). 

Old Age Insurance: Rogers & Millar, Old Age Pensions (1903); 
S. Wellington, Old Age Dependency in the United States (1914); M. 
Nassau, Old Age Poverty in Greenivich Village (19 15). 

Unemployment Insurance: W. H. Beveridge, Unemployment (1909); 
I. C. Gibbon, Unemployment Insurance (191 1); S. & B. Webb, Public 
Organization and the Labour Market (1910); S. Webb, ed. Seasonal Trades 
(1912); Rowntree, Seebohm & Lasker, Unemployment (1911); A. C. 
Pigou, Unemployment (1914); A. Kellor, Out of Work (1915). 

248. The Reasons for Social Insurance 

Social insurance may be defined as the attempt to remove from 
the working classes through associated effort those peculiar 
hazards to life, health and comfort which are due to the modern 
industrial system. The difference between business and social 
insurance is that in the one case the premiums are paid by the 
insured, whereas in the other this is true only in part, if at all. 
For the object of social insurance is to emphasize the social 
causes of these hazards and to accentuate the responsibility of 

655 



656 Social Insurance [§248 

society as a whole. The term, however, also includes those 
forms of aid where the workman makes no contribution at all 
and where we have to deal with state pensions rather than with 
premiums. 

The problem here involved is a result of modern industry and 
democracy. On the one hand the instability of modern indus- 
trial life and the hazards to which the wage earner is exposed 
have multiplied enormously; and on the other hand the relative 
ability of wage earners to withstand these risks has diminished. 
That the condition of the workman has improved is true. This 
means, however, that his general standard of life has risen; it 
does not mean that there is an increase in the available surplus 
above his necessary living expenses. Yet without such surplus 
there is little opportunity of meeting the cost of these im- 
mensely augmented risks, which are responsible for much of 
modern poverty and destitution. The inadequacy of individ- 
ual provision for these risks is one of the chief reasons for 
social insurance. 

The other reason is the feeling that every individual should, 
so far as possible, be permitted to share in the benefits of modern 
civilization; and that he is often prevented from doing this by 
something other than his own fault. If there is such a con- 
ception as social wealth, or the wealth created by society as a 
whole, there is room also for the conception of social risks, that 
is, risks created by modern industry and which tend to check 
the growth of this social wealth. The aristocratic ideas in both 
industry and politics formerly emphasized the need of the 
exceptional man and underrate'd the importance of the many. 
The meaning of modern democracy, whatever be its short- 
comings, is that insistence be placed in both economics and 
politics on the needs and the opportunities of the many. One 
of these needs is that of social or community provision for the 
hazards that are not referable to individual fault. Thus both i 

democracy and industry are responsible for the m^odern concep- 
tion of social insurance. 



§ 249] Accident Insurance 657 

The five chief hazards in question are those connected with 
accidents, sickness, invalidity, old age and unemployment. 
There are therefore five chief forms of social insurance. 

249. Accident Insurance 

That the modern factory system has multiplied industrial 
accidents is now universally recognized. In eleven European 
countries there are now about two million industrial accidents a 
year, of which over 22,000 are fatal. In the United States in 
1908, in the so-called "registration area," covering about one- 
h^li of the population, the number of fatal accidents due to 
"industrial causes" varied from 20,000 to 36,000, according to 
the interpretation given to the term. In the railroad industry 
alone in 1910 there were about 130,000 accidents to employees. 
In the country as a whole industrial accidents are probably not 
far from two millions a year, of which about 30,000 are fatal, 
about 200,000 lead to permanent disability, and about 170,000 
result in a disability of at least three months. 

The first attempt to grapple with this evil was the system of 
employers' liability. The effort of the wage earner, however, to 
secure redress was, in English-speaking countries at least, seri- 
ously impeded by the development during the nineteenth 
century of the so-called three defences: (i) The fellow-servant 
doctrine. Why should the employer, it was argued, be held 
responsible for the injury that was caused by one employee to 
another? (2) The assumption-of-risk doctrine. If a workman 
chooses to take up a specific occupation does he not voluntarily 
assume the risk connected therewith, and is he not at liberty 
to abandon the employment? (3) The doctrine of contributory 
negligence. Why should the employer be responsible when 
the wage earner himself through his negligence contributes to 
the accident? 

The result was that only in exceptional cases could the work- 
man recover any damages at all. Most accidents remained 
uncompensated; the amount recovered bore little proportion to 
42 



658 Social Insurance [§ 249 

the nature of the injury or the need; and it was secured, if at all, 
only after a long time. Furthermore, a great part of the funds 
was wasted in lawyers' fees and the attempt of a workman to 
bring suit for an accident ordinarily led to his dismissal. Even, 
therefore, in cases where the force of the alleged three defences 
was gradually weakened by judicial interpretation or statute, 
the employers'-liability system continued to be distasteful to 
the wage earner; while on the other hand, the increase in occa- 
sional large verdicts and the loss resulting from the friction in 
industrial disputes gradually caused the employers to realize 
the inadequacy of the system. 

Accordingly, employers' liability has been replaced by work- 
mea's compensation or accident compensation. The funda- 
mental feature of this is the adoption of the principle of the 
trade risk or the professional risk, based on the conception of 
a hazard attaching to the industry. 

While under the compensation system the burden is shifted 
to the industry and is ultimately borne by the community, 
it is borne in the first instance by the employer. In order to 
distribute over a group the risks of the individual employers, 
recourse was taken to the principle of insurance. 

Accident insurance is of two kinds: voluntary insurance, 
where the employer is left at liberty to insure, as in England 
under the workman's compensation act of 1897 and in France 
= since 1898; or compulsory insurance, which was introduced in 
Germany in 1884 and adopted by Austria in 1887 and Italy in 
1898. Of the European countries with the compulsory insur- 
ance system some permit the employers to choose the insurance 
institutions, while others prescribe institutions under more or 
less strict control of the government, and some even offer 
insurance through the government itself. Which method is 
pursued makes perhaps little difference as long as the chief objects 
of an accident-compensation system are achieved, namely, the 
inclusion of as wide a range of industry as possible (in Great 
Britain all industries); the security of payment, which can be 



§ 249] Accident Insurance 659 

reached only through some form of governmental guaranty or 
supervision; and the provision of adequate compensation, 
which was originally about half, and which is now gradually 
being increased to three-quarters, of the wage. 

In the United States the first law on the subject, that of 
Maryland in 1902, was declared unconstitutional. The first 
federal act was that of 1908. The Massachusetts law of 1909 
providing for optional insurance remained a dead letter and the 
Montana law was declared unconstitutional. A similar fate 
befell the New York law in 19 10. Since 191 1, however, the 
movement spread so rapidly that by 1920 all but five Southern 
states had adopted compensation laws, representing every 
phase of the system from optional and voluntary insurance in 
private institutions to an out-and-out government insurance. 

The most advanced law is the workmen's compensation law 
of New York of 19 13-14. Compensation, granted in forty-two 
groups of occupations (not including agricultural or domestic 
service) is due in every case except where the injury is occasioned 
by the willful act of the employee or where it results solely from 
intoxication. The normal rate of compensation is two-thirds 
of the average weekly wage, which continues during the period 
of disability, with special provisions for the loss of various 
members of the body, and carefully defined death benefits. 
The payment is secured by the employer's obligation to insure in 
the state insurance fund, in a private insurance company, or in 
exceptional cases by self insurance under strict control of the 
compensation commission. 

The objection is sometimes made that accident insurance is 
no solution, because what is desired is prevention rather than 
compensation. It is forgotten, however, that compulsory com- 
pensation is the surest inducement to achieve prevention. Just 
as fire-insurance methods have led to improvements in fire 
prevention, so the employers have banded themselves together 
in occupational or territorial groups, which have vied with each 
other in installing improvements to prevent accidents and thus 



66o Social Insurance [§ 250 

to keep down the insurance premiums. Hence accident insur- 
ance is thoroughly justified — from the point of view of the 
individual workman, of the employer, and of society at large. 
It tends not only to diminish accidents but to eliminate the 
risks of accident. 

250. Health Insurance 

While the conception of individual fault has now finally dis- 
appeared in the case of accident, the social aspect of illness is 
only beginning to be recognized. Yet the distinction is after 
all one of degree rather than of kind. There are indeed non- 
occupational diseases, but so there are non-occupational accidents; 
and as in the case of accidents the overwhelming mass of illness 
from which the modern wage earner suffers is due more or less 
directly to the conditions of employment or of remuneration. 
The destitution caused, under the modern industrial system, by 
more or less preventable illness is scarcely inferior to that occa- 
sioned by accidents. 

Most of the arguments used in the case of accident insurance 
are therefore applicable to health insurance. As a matter of 
fact the first law on the subject was the German act of 1883, 
which provided for compulsory health insurance. Austria 
followed in 1888, but the movement subsequently lagged until 
a new impetus was given to it by the enactment in 191 1 of the 
British National Insurance Law. While we do not find in either 
Germany or England any state insurance fund, government 
control is rigid, and the insurance is compulsory. In the United 
States the compulsory insurance system has come first in the 
case of accidents; in England and Germany it has come first in 
the case of illness. 

In Germany a distinction is made between sickness as a merely 
temporary phase and invalidity as a more permanent condition. 
The sick benefits in Germany are therefore limited to a definite 
period, originally thirteen weeks, but changed in 1903 to from 
twenty-six to fifty-two weeks. This method has been followed 



§250] Sickness Insurance 661 

in all of the other countries except in England, where the na- 
tional insurance act provides benefits unlimited in time. The 
strictly sickness benefit, however, lasts even in England only 
for twenty-six weeksV 

In the second place, the insurance premiums are divided in 
Germany between the employer and the employee, the former 
defraying one-third and the latter two-thirds of the cost, the 
premiums being affixed weekly to the cards by means of stamps. 
Under the British act the state also makes a contribution, thus 
recognizing more specifically the essential social character of 
the scheme. The state makes a weekly payment of 2d., the 
employer 3d., and the wage earner 3d. in the case of women and 
4d. in the case of men. Finally, while the general basis of sick 
benefits in Germany is one-half the wage, the British law grants 
definite amounts, los. a week to men and y^s. to women, with a 
continued payment of 5s. a week after twenty-six weeks. Equally 
significant with the financial aid are the provisions of the British 
law for medical and surgical benefits, medicine supplies and ap- 
pliances of various kinds, and hospital treatment. While there 
has undoubtedly been some malmgering or feigned sickness, the 
drawbacks of the system are overwhelmingly outweighed by the 
benefits. 

In addition to the sick benefits attention must be directed to 
the lying-in or maternity and the funeral benefits. Italy, where 
there is as yet no general compulsory sickness insurance, first 
introduced a special, compulsory maternity insurance in 1910, 
as an outcome of the law requiring the cessation of female work 
for a month after childbirth. In England and Germany provi- 
sion for lying-in or maternity benefits is included in the general 
system. 

Health insurance in the United States is thus far only private 
and voluntary. With the growing realization on the part of the 
public that the social aspect of disease is often more important 
than that of accidents, it is to be expected that this form of 
social insurance will before long be introduced here also. 



662 Social Insurance [§ 251 

251. Old Age Insurance 

The modern importance attaching to old age is due to the 
speeding up of the new industrial system and to the great diminu- 
tion in the period of life during which full wages can be earned. 
Not only is the age limit at which applicants for work are taken 
on continually being reduced, but the strain of modern machinery 
frequently induces a premature weakening of the capacity for 
work which accentuates the normal disadvantage of natural 
old age. So much pauperism has resulted that the problem of 
insurance against old age is now everywhere coming to the 
front. 

The earliest forms of such insurance were entirely of a 
voluntary character. In the middle of the nineteenth century, 
however, France instituted a system designed to encourage indi- 
vidual provision for old age, to put old age pension insurance 
upon sound actuarial principles, and to reduce the cost to the 
lowest limit. Half a century later Italy and Belgium offered 
government subsidies to voluntary old age insurance. 

It was not, however, until 1889 that a national system of 
compulsory old age insurance was adopted by Germany. Two 
decades later, in 19 10, France adopted a similar system. In 
both countries the dues, which vary with wages, are shared 
equally between employer and employee. The employer is 
required to attach the stamps to the workman's card and is 
permitted to deduct the one-half from the wages. In many 
cases, in Germany at least, employers defray the entire cost. 
The government bears the cost of the central administration, 
furnishes the postoffices as financial agencies, and when the 
pensions have finally matured, makes a contribution (50 marks 
in Germany, 100 francs in France). In Germany the pensions 
begin at 70, in France, since 191 2, at 60 years of age. In 
Germany the administration is in the hands of large territorial 
institutions under government supervision; in France there are 
in addition to the government fund mutual benefit societies 



§ 251] Old Age Insurance 663 

and other institutions. In both countries, however, employees 
as well as employers are represented in the management. 

Another method of meeting the old age problem is illustrated 
by the system of non-contributory pensions provided entirely 
by the government. Denmark introduced this system in 1891, 
followed by New Zealand in 1898, and the Australian states a 
few years later. In 1908, England adopted this method, granting 
to everyone who has reached the age of 70 and whose annual 
income does not exceed £31, los., who is not a pauper, and who 
has been a resident at least twenty-five years, a sum varying from 
IS. to 5s. a week. The number of pensioners in England in 
1913 was about a million and the expenses over twelve millions 
of pounds. 

In the United States the discussion has only just begun. 
Until recently the recognition of its need was very imperfect. 
As late as 19 10 the Massachusetts Commission advanced the 
following objections: (i) heavy expenses; (2) moral effect upon 
the character in destroying the habit of thrift; (3) disintegrating 
influences on the family; and (4) harmful effect upon wages. 
These criticisms, however, are not substantiated by the experi- 
ence of the European countries which have adopted the system. 

A variation of the movement has recently been spreading in 
the United States in the shape of the widows' pensions. From 
the very beginning of the old age insurance system, attention 
was directed to the necessities of the surviving dependents. 
Even in the original German law, where financial conservatism 
was at the outset necessary, a provision was inserted by which 
there are returned to the widows or orphans all contributions 
made by a workman if he dies before receiving a pension. A 
similar section was inserted in the French law of 19 10, with an 
additional provision for death benefits, varying from 150 to 300 
francs. In 191 1, however, in the general revision of the insur- 
ance laws Germany added a comprehensive national system of 
widows' and orphans' pensions. 

In the United States the first mothers' pensions act was 



664 Social Insurance [§ 252 

passed by Illinois in 191 1. Two states followed in 191 2, four- 
teen more in 1913. By 1919 the system had spread throughout 
the country. Although popularly called mothers' pensions they 
are really pensions for dependent children to be paid to the 
widows or wives of deserting, disabled, or imprisoned husbands. 
As an entering wedge for a broader application of the principles 
of social insurance, the movement for mothers' pensions is 
significant. 

252. Invalidity Insurance 

By invalidity is meant incapacity to earn wages through 
physical weakness. Invalidity may be the result not only of 
accident, but of sickness, or old age. Accordingly it is dealt 
with as a part sometimes of sickness insurance, sometimes, as in 
France, of old age insurance. As the sick, pensions almost 
everywhere cease at the expiration of a short period, and as old 
age pensions do not begin until the attainment of a definite age, 
there is evident need of caring for cases of invalidity which 
are not relieved by some form of accident compensation. 

The conception of invalidity as found in some of the European 
laws is total and permanent disability to earn a living. This is 
true of England under the national insurance act of 191 1, one of 
the objects of which is stated to be "to provide for insurance 
against loss of health." Here, it will be- remembered, the sickness 
benefit ceases after 26 weeks. It may then be followed by a 
"disablement benefit" of 5s. a week payable after two years' 
weekly insurance contributions, and continued as long as the 
laborer is "rendered incapable of work by the disease or disable- 
ment." The chief criticism of this provision is the difficulty 
that will be encountered in interpreting the term "incapable 
of work." The old phrase "able-bodied" in the English poor 
law proved to be a thorn in the flesh of the commissioners and 
much the same may be expected from the new term. In France 
the insured is permitted to demand the beginning of his old age 
pension at 55 instead of 60, but with a corresponding actuarial 



§ 253] Unemployment Insurance 665 

reduction in the amount of the pension. Furthermore, anyone 
suffering from a permanent and total disability may secure in 
addition to special invalidity subsidies an immediate liquidation 
of his old-age pension under these rules. 

In Germany, on the other hand, there is a separate system of 
invalidity insurance; and invalidity is not confined to total and 
permanent disability to earn a living. On the contrary a re- 
duction of the earning capacity to one-third of the normal is 
sufficient to establish invalidity, which may come from either 
sickness or incipient old age. An invalidity pension, ranging 
from no to 300 marks, may be obtained after 200 weeks of 
insurance, even though but 100 weekly contributions have been 
made, or after 500 weeks of insurance, irrespective of the number 
of contributions. As a consequence anyone whose illness lasts 
for more than 26 weeks is turned over from the sickness to the 
invalidity fund, and even if he has not had any disease, ap- 
proaching old age will enable him to take advantage of the 
invalidity pension. Invalidity pensions are hence becoming 
more popular than the old-age pensions. 

Congress established in 1920 a system of compulsory, con- 
tributory old age and disability insurance for employees in the 
classified civil service. ^ As the discussion develops, much will 
be learned from a comparison of the foreign methods. 

253. Unemployment Insurance 

Perhaps the most baffling of modern labor problems is unem- 
ployment. In 1900 in the United States there were about six 
and a half million workers unemployed for more than a month, 
and of these about two and a half millions were unemployed 
from four to six months, and about three-quarters of a million 
between seven and twelve months. As Mr. Beveridge has 
stated: "The problem of unemployment lies, in a very special 
sense, at the root of most other social problems." 

That there is a personal factor in unemployment is undoubted. 
Some are inefficient; some like the hobo, the tramp, and the 



666 Social Insurance [§ 253 

criminal are altogether unemployable. But far more important 
than this is the social or industrial factor — the unemployment 
due to the organization of modern industry. Unemployment 
is due largely to fluctuations in industry, of which there are four 
chief categories: 

(i) Periods of prosperity and depression. The problem of 
crises and business cycles has been discussed above (§ 209). 

(2) Short- time fluctuations due to seasonal trades, that is, 
trades active for only a part of the year or more active in one 
season than in another. The cause of this is either directly or 
indirectly weather conditions. 

(3) Fluctuations in the casual trades, where the labor contract 
is made for only a few weeks, a few days, or even a few hours, as 
in the case with dock laborers, lumberjacks, etc. 

(4) Fluctuations due to the disappearance of old and the 
creation of new industries, as a result of mutations in business 
fortunes, of change of fashion, or of inventions. 

The last point is the one to which least attention has hitherto 
been paid. Yet it was emphasized over three quarters of a 
century ago in the following passage: '' Humanity and justice 
to man demand that those who themselves suffer for the public 
good should be relieved at the public^ expense. Whenever a 
new application of mechanical power throws a particular class of 
operatives out of employment, a national fund should be pro- 
vided to aid them in betaking themselves to other occupations. 
It is a disgrace to the legislature of the country that the enormous 
body of hand-loom weavers should have been left so long in 
misery and destitution and toiling to death in the hopeless 
competition with the power loom."^ 

The problem of the unemployable is a problem of the defec- 
tive and the criminal classes. The problem of the unemployed, 
is that of the able-bodied man willing to work but unable to 
find a chance. 

Three suggestions have been made to lessen unemployment 
^Torrens, On Wages (1834), p. 34. 



§ 253] ' Unemployment Insurance 667 

First, is the creation of public employment exchanges. We 
frequently find an oversupply of labor in some industries, coupled 
with a simultaneous undersupply in others. In the United 
States farmers are often crippled for help when industries not 
far off are working on half time. The object of the public 
employment bureaus is, as it has been expressed, to bring to- 
gether the jobless man and the manless job. In the United 
States this phase of the problem is being attacked by both 
state and federal legislation. 

The second suggestion is the regularization of employment. 
The cyclical fluctuations do not perhaps at present lend them- 
selves to regulative action; but it is different with the seasonal 
and the casual trades. Not a little can be accomplished by pri- 
vate effort and through carefully devised regulation to spread 
more equally over a whole year the activity which is now found 
only in spurts. In casual trades, like the docks, English ex- 
perience has shown that a simple change in the method of 
engaging the laborers may bring about a far greater regularity 
in employment. 

Thirdly, the development of vocational schools may do much 
to diminish the horde of ill-prepared young people whose onset 
into industry often accentuates the difficulties of irregularity of 
employment. 

The above methods, designed to diminish irregularity, are 
preventive. But in so far as the irregularity persists, the 
resulting evils may largely be obviated by attacking the uncer- 
tainty itself through insurance. Unemployment or out-of-work 
insurance is of three kinds first, subsides paid by govern- 
ment to the insurance funds of trade unions, known as the 
Ghent system, because first employed in the city of Ghent in 
1900, and since then imitated in many other places. Secondly, 
we find the system of government unemployment funds where 
the government itself organizes the insurance institution and 
offers its benefits, including a financial subsidy, to the workman. 
Such a fund was started by Berne in 1893, followed in 1896 by 



668 Social Insurance [§253 

Cologne, and other cities. The third method is the system of 
compulsory insurance for all workmen. This was initiated in 
1894 by St. Gall, although abandoned after a short time. In 
191 1, however, the English national insurance act introduced 
this system on a huge scale. 

The English law applies to seven trades where the evils of 
unemployment have been the greatest: building, construction 
of works, ship building, mechanical engineering, iron foundries, 
construction of vehicles, and saw milling. The Board of Trade 
however, has the power under certain conditions to extend the 
provisions of the act to other trades. The number of workmen 
in these trades is calculated at about two and a half millions, 
Every employee must deposit an insurance book with the em- 
ployer who is obligated to pay the insurance premium by affixing 
weekly a 5d. stamp, one-half of which he may deduct from the 
wages. The government adds one-third of the total contribu- 
tions received; or, in other words, contributes one-quarter while 
the employer and the' employee together pay three-quarters of 
the total premium. The unemployment benefit, of ys. a week 
and limited to fifteen weeks in any year, begins after the first 
week of unemployment. In the case of strikes the benefit 
ceases. The government offers a subsidy to trades unions that 
provide additional unemployment insurance. After a man has 
reached the age of 60 and has paid 500 weekly contributions, he 
may receive back with interest all that he has paid in, less what 
has been received as benefits. Finally, employers who have 
kept their workmen continuously employed for a year may 
claim a refund of one-third of their payments at the end of the 
year. 

The English law is the latest and most interesting attempt to 
deal with the evils of unemployment on a gigantic scale. Its 
operation will be watched with the greatest interest, and it may 
fairly be surmised that it will before long be followed by other 
countries, including the United States. 



CHAPTER XXXIX 
POVERTY AND PROGRESS 

254. References 

In General: Charles Booth, Life and Labour of the People in London 
(17 vols., new ed., 1902); B. S. Ro\\Titree, Poverty; A Study in Town 
Life (1901) and The Human Needs of Labour (1918); M. Parmelee, 
Poverty and Social Progress (1916); J. A. Hobson, Problems oj Poverty 
(1891) and Work and Wealth (1914); H. Fawcett, Pauperism; Its Causes 
and Remedies (1871); C. B. Spahr, Distribution of Wealth in the United 
States (1896); C. D. Wright, Practical Sociology (1914), chs. xviii, xxv; 
W. Smart, The Distribution of Income (1899), bk. ii, ch. viii; B. and 
S. Webb, The Prevention of Destitution (1911); F- H. Streightoff, The 
Distribution of Incomes in the U. S. (191 2); W. I. King, The Wealth and 
Income of the People of the U.S. (1915)- 

Descriptions of Poverty: C. B. Spahr, America's Working People 
(1900); W. A. Wyckoff, The Workers (1897-1899); J. A. Riis, How the 
Other Half Lives (1890), and The Battle ivith the Slum (1902); Hull House 
Maps and Papers (1895); A. M. Simons, Packingtown (1899); P. Roberts, 
The Anthracite Coal Communities (1904) ; The Pittsburgh Survey (6 vols., 
1910-1912), Bowley and Burnett, Livelihood and Poverty (1915); C. B. 
Barnes, The Longshoremen (191 5). 

Luxury: E. de Laveleye, Luxury (1891); H. M. Thompson, The 
Purse and the Conscience (1891). 

Cost of Living: W. O. Atwater, Principles of Nutrition and Nutri- 
tive Value of Food {Farmers' Bulletin, no. 142, rev. ed., 1902), and The 
Chemical Composition of American Food Materials {Bulletin, no. 28, rev. 
ed., 1899); Atwater and Benedict, Experiments in the Metabolism and 
Energy in the Human Body, 1900-1902; L. B. More, Wage Earners' 
Budgets (1907); T. Ryan, A Living Wage (1907); Wartime Changes 
in the Cost of Living, igi4-igig (National Industrial Conference Board, 
1919); F. H. Streightoff, The Standard of Living among the Industrial 
People of America (191 1); F. Franklin, The Cost of Living (1915); Stand- 
ards of Living: a Compilation of Budgetary Studies (rev. ed., 1920), pub. 
by Bureau of Applied Economics. 

Poor Laws and Charity: J. Nicholls, History of the English Poor 
Law (1854, new ed., 1904); A. J. Warner, American Charities (2d ed., 
1908); E W, Capen, Historical Development of the Poor Law of Connecti- 

669 



670 Poverty and Progress [§ 255 

cut (1904) ; E. T. Devine, The Principles of Relief (1904) and Misery and 
its Causes (1909); J. Lee, Constructive, and Preventive Philanthropy 
(1902); Committee of Fifteen, Report on the Social Evil (191 2); National 
Conference of Charities and Corrections, Annual Reports (1874 — ). 

255. Luxury 

In our study of the distribution of wealth attention was 
devoted primarily to the shares of the various classes in distri- 
bution. To the individual, however, the share of the total 
product that accrues to the particular class is of slight conse- 
quence when compared to his own participation in this share. 
The economic problem to him is as to the amount of wealth 
that he personally can secure. To the community as a whole, 
also, it makes a great difference whether a given sum of wealth 
is shared in an approximately equal fashion among its separate 
members or whether a minority lives in affluence and the mass 
in squalor. The coexistence of luxury and poverty has always 
been the stumbling-block of the social reformer. To this most 
baffling question we must now turn our attention, although 
almost every one of the preceding chapters has indirectly touched 
upon the same subject. 

The problem of luxury in itself, and not considered as a 
concomitant of poverty, involves few difficulties. The discus- 
sion, however, has often been one-sided; for here as elsewhere 
extremists have not been lacking. The apologists for luxury, 
for example, have from time immemorial sought to justify 
themselves by the plea that luxurious expenditure is beneficial 
because it affords employment to labor. The merest tyro in 
economic reasoning, however, will at once perceive the weak- 
ness of this hoary argument. If luxurious expenditure is 
productive simply because it employs labor, the accidental 
breaking of a window-pane or the wanton destruction of a 
growing crop is also productive in so far as it will require labor 
to repair the damage. The fallacy clearly consists in the 
assumption that the wealth spent in luxurious outlay would 
otherwise not be devoted to production. Obviously, however, 



§255] Luxury 671 

if the spendthrift chooses not to waste his funds, they will take 
the form of the purchase of securities, of investment in some 
enterprise or of a cash balance in the bank; and in each case 
they will ultimately be devoted to production and thus give 
employment to labor. 

On the other hand, the opponents of luxury go to an equally 
extravagant length. "Plain living and high thinking*' is indeed 
a most admirable moral precept, inattention to which has re- 
sulted in the ruin of many an individual. The evils of ostenta- 
tion and the passions of sensuality are as glaring as they are 
reprehensible. From a broader point of view, however, plain 
living may be carried to an extreme. Civilization, as we learned 
at the very outset of this treatise, depends on the multiplication 
of wants. If goods are to be divided into necessaries, con- 
veniences and superfluities, progress may be described as the 
process of converting superfluities into conveniences and con- 
veniences into necessities. The diversification of consumption 
lies at the root of human development. It is undoubtedly true 
that we can have no lasting progress without the accumulation 
of capital and the application of labor to raw material; but it 
is equally evident that while a population every member of 
which is devoted entirely to wheat-raising or to the making of 
rough clothes or shelter may be very estimable, it will indis- 
putably be lacking in many of the qualities that we associate 
with higher civilization. It would, to mention nothing else, 
leave no room for the whole domain of art, which is in some 
respects the supreme achievement of the human race. Yet no 
one will make fine or beautiful things unless there is a demand 
for them, and this demand necessarily implies luxury some- 
where. Thus we seem to reach the position that luxury is evil 
and at the same time indispensable. 

The difficulty, however, is really not serious. Luxury of some 
kind is indeed inevitable, but what is one man's luxury is another 
man's necessity. The real test of the economic legitimacy of 
luxury is the relation between the economic importance of the 



672 Poverty and Progress [§ 255 

outlay and the economic importance of the result to the commu- 
nity as a whole. If a particular individual is markedly important 
for the community, society will not and ought not to begrudge 
him a more or less lavish expenditure in keeping with its estimate 
of his public importance. There is usually a close relation be- 
tween consumption and production. It is true that in a young 
country like the United States men will often accumulate wealth 
for the sake of power and lead comparatively simple and busy 
lives. Almost everywhere else, however, it is a fact, and even in 
the United States it is a tendency, for people who acquire wealth 
easily to spend it lavishly. To the extent, therefore, that con- 
sumption is the objective point of production, the prohibition of 
luxury would be apt to work as an impediment to enterprise, 
and what would be gained at one end would be lost at the other. 
From this point of view the luxury of an individual who is eco- 
nomically important in the sense that he is adding materially 
to the productive forces of the community is justifiable. 

Luxury as a legitimate economic phenomenon may, however, 
be abused by those who possess the wealth or power without 
enjoying the real social importance. They spend, but give 
nothing in return. In the case of private individuals the most 
obvious example is the man who has received a large fortune 
by gift or inheritance and who has done and is doing nothing 
of value to the community. Luxury of this kind is economi- 
cally injurious. But luxury may also be associated with the 
government. , Where there is an absence of constitutional 
liberty, the individual potentate may abuse the privilege, and 
we reach a situation like that in the time of Louis XIV in France, 
where the luxury of the court proved to be a heavy burden 
to the people. In a democracy, however, this danger does not 
exist, and there is even a risk of going too far in the opposite 
direction. The president of republican France indeed receives 
a special allowance for entertainments; but the lack of suitable 
homes and adequate salaries for American diplomatic represen- 
tatives abroad has long been a national mortification. 



§ 255] Luxury 673 

The real economic ideal is the socialization of luxury, in the 
sense either that private luxury should give way to public luxury, 
or that the luxury of the individual should be confined to those 
who are of true importance to the community and who are 
transfused by the sense of social responsibility. The economic 
test of all expenditure is the creation of a surplus of satisfactions. 
The wider the range of the participants in a given expenditure, 
the greater the surplus. Artistic and beautiful, even if expen- 
sive, things are indeed desirable; but to accomplish the greatest 
economic as well as ethical good, their enjoyment should not 
be monopolized by the few. In classic Greece the choicest 
sculptures and paintings were displayed in the streets and 
temples; and even in modern times the public galleries are 
assuming continually greater dimensions. Where the principle 
of the public trusteeship of private wealth has permeated the 
community we find, as in a few of the European cities, that the 
private galleries are so only in name, and that they are peri- 
odically, if not continuously, thrown open to the public. 

Thus the economic view of luxury does not really differ from 
the ethical. From the moral point of view the self-indulgent 
luxury of the mere sensualist is always to be deprecated: a pri- 
vate Maecenas is relatively defensible; but a public Maecenas is 
still more admirable. From the economic point of view, the test 
is the importance to society of the luxurious outlay. The luxury 
of a jneie faineant is always an economic loss; the luxury of the 
individual who has honestly acquired his wealth, who has been 
spurred on to activity by the thought of the ultimate reward, 
and who has succeeded by serving the community is relatively 
defensible; but public luxury or the luxury of the same individual 
when he devotes his wealth to public purposes is a more distinct 
economic gain, because with the same outlay of effort there is 
now a greater enjoyment, and thus a greater surplus of utility. 
In both public and private expenditure, however, great care must 
be exercised not to carry luxury to an extreme. Ethically the 
danger is that the aesthetic element may be engulfed in sensual- 
43 



674 



Poverty and Progress 



[§256 



ity; economically the danger is that the surplus or the wealth of 
the community may be whittled down by increasing consump- 
tion at the expense of production. 

256. The Facts of Poverty 

Poverty, like luxury, is a matter of degree. Yet from one point 
of view we may contrast absolute with relative poverty. Abso- 
lute poverty may be defined as that condition where the income 
is insufficient for the bare minimum necessary to maintain phys- 
ical efi&ciency. Relative poverty, on the other hand, would be 
the inability to maintain the standard of life which in civilized 
countries includes something more than mere subsistence. 

Poverty depends on the relation of income to the cost of liv- 
ing. It is therefore a matter of considerable importance to de- 
termine on the one hand the income and on the other the ex- 
tent and the elements of the cost of living. Unfortunately the 
material at our disposal is exceedingly inadequate, except as to 
the proportion of elements in expenditure. 

As to these the three fundamental expenses are, in their order 
of importance, the expense for food, shelter and clothing. Sev- 
eral decades ago, the German statistician, Engel, made some cal- 
culations as to the percentages of various items of expenditure. 
More recently the United States Bureau of Labor has conducted 
elaborate investigations. Taking several thousands of normal 
families classified according to their income, the bureau found 
the percentage of expenditures in 1901 to be as shown in the table 
on the following page.^ The same facts are illustrated graphi- 
cally in the chart opposite page 674. 

These results in the main confirm those obtained by Dr. Engel, 
although there are some discrepancies. Dr. Engel's propositions 
were as follows: — 

(i) The greater the income, the smaller the percentage of 



^ United States Bureau of Labor, Eighteenth Annual Report, Cost of 
Living and Retail Prices of Food, 1904, p. loi. 



PER CENT OF TOTAL EXPENDITURE MADE FOR VARIOUS PURPOSES IN 
NORMAL FAMILIES IN THE UNITED STATES, 1901. BY SIZE OF INCOME.. 


INCOME 
UNDER $200 


20 40 60 80 




1 








II 






$200 TO $300. - -- 
















m 






$300 TO $400 

$400 TO $500 

$500 TO $600 

$600 TO $700.__ 

$700 TO $800 _._ 














































































































$800 TO $900 




















$900 TO $1000 




■■■ ^ 


















$1000 TO $1100 
























$1100 TO $1200 






















$1200 AND OVER 




















1 






ALL SIZES OF INCOME 






■P 












1 1 




■■i FOOD 'IbbB clothing F~~1 lighting 

1 1 RLNI I ! l-UbL 1 1 sundries 



From Bulletin of US. Bureau of Labor, No. 54 (1904;. 



256] 



The Facts of Poverty 



675 



outlay for subsistence. This is confirmed by the American in- 
vestigation. 

(2) The percentage of outlay for clothing is approximately 
the same, whatever the income. This is not confirmed in Amer- 
ica, where the highest class spends relatively twice as much as 
the lowest class. 

(3) The percentage for lodging or rent and for fuel and 
lighting is approximately the same whatever the income. In 



Classified 
Income 


Rent 


Fuel 


Light- 
ing 


Food 


Clothing 


Sundries 


! 

Total 


Under $200 


16.93 


6.69 


1.27 


50.85 


8.68 


15-58 


100 


$200-$300 


18.02 


6.09 


I-I3 


47-33 


8.66 


18.77 


100 


$3oo-$400 


18.61 


5-97 


1. 14 


48.09 


10.02 


16.09 


100 


$4oo-$5oo 


i8.S7 


5-54 


1. 12 


46.88 


11-39 


16.50 


100 


$5oo-$6oo 


18.43 


5-09 


1. 12 


46.16 


11.98 


17.22 


100 


$6oo-$7oo 


18.48 


4-65 


1. 12 


43-48 


12.88 


19-39 


100 


$7oo-$8oo 


18.17 


4.14 


1. 12 


41.44 


13-50 


21.63 


100 


$8oo-$90o 


17.07 


3-87 


1. 10 


41-37 


13-57 


23.02 


100 


$900-$ I 000 


17-58 


3-85 


I. II 


39-90 


14.35 


23.21 


100 


$1000-$ I 100 


17-53 


3-77 


1. 16 


38.79 


15.06 


23.69 


100 


$II00-$I200 


16.59 


3-63 


1.08 


37.68 


14.89 


26.13 


100 


$1200 or over 


17.40 


3-85 


1. 18 


36.45 


15-72 


25.40 


100 



America this is the case as to rent, but not as to fuel, the 
expenditures for which decrease as income increases, per- 
haps because of better clothing, perhaps because heating of 
large buildings is more economical than in the case of small 
houses. 

(4) As income increases in amount, the percentage of out- 
lay for sundries becomes greater. This is confirmed. 

The American investigation also sought to ascertain the 
variations in expenditure according to the size of the family, 
and the result is shown in the following table of percentages 
for a large number of families with an income of from $600 to 
$700: 



6/6 



Poverty and Progress 



[§256 



Object of 
Expendi- 
ture 


No 


One 


Two 


Three 


Four 


Five 


All 


Children 


Child 


Children 


Children 


Children 


Children 


Families 


Rent. . . 


20.20 


18.88 


17.88 


17-93 


17.97 


17.04 


18.48 


Fuel .. 


4-75 


4.69 


4.60 


4-58 


4-79 


4.49 


4-65 


Lighting 


1. 18 


I-I3 


1. 16 


1.02 


1.09 


.98 


1. 12 


Clothing 


12.44 


12.81 


12.82 


12.84 


13-45 


13.90 


12.88 


Sundries 


21.30 


20.58 


19-95 


18.69 


15-50 


14.97 


19-39 


Food . . 


40.08 


41.91 


43-59 


44-93 


47.20 


48.62 


43-48 


Total . 


100 


100 


100 


100 


100 


100 


100 



The percentages of combined expenditure for 2,567 families 
selected for detailed investigation were as follows: 



Food 42.54 

Clothing 14.04 

Rent 12.95 

Fuel 4.19 

Furniture 3-42 

Insurance 2.73 

Sickness and Death . . . 2.67 

Liquor 1.62 



Tobacco 1.42 

Labor and other Organiza- 
tion Fees 1. 17 

Books and Papers .... 1.09 

Lighting 1,06 

Religious Purposes .... .99 

Taxes 75 

Charity 31 



Amusements and Vacation 1.60 Other Purposes 5.87 



Mortgages on Home 



1.58 



Total 100 



When, in lieu of taking percentages, we seek to ascertain 
the actual minimum of necessary expenditure for each pur- 
pose, exact figures are unfortunately lacking. The chief sci- 
entific results are confined to the item of food, and are due 
to the investigations of Professor Atwater, published by the 
United States Department of Agriculture. The quantity of 
food required is nowadays put in terms of protein (one of the 
nutritive ingredients of food) and potential energy (in the form 
of heat and muscular strength yielded by food). Potential 
energy is usually expressed in heat units or Calories," a calorie 
being the amount of heat needed to raise a gram of water one 
degree Centigrade. Atwater has calculated that, according to the 
muscular work accomplished, food carrying from 100 to 150 



§ 256] The Facts of Poverty . 677 

grams of protein, yielding 2,700-4,500 calories, is needed daily. 
Men doing average moderate work in a temperate climate require 
3,500 calories, and women eight-tenths of this amount. Detailed 
studies have also been made as to the nutritive and economic 
qualities of various kinds of food and the relation of nutrition to 
waste, careful attention to which would enable far better results 
to be attained by the same outlay as at present. The American 
workman especially would gain much by utilizing these interest- 
ing results. 

The principal application of such considerations to the statis- 
tics of poverty has been made by Rowntree in his remarkable 
study of conditions in the town of York. According to his cal- 
culations, the minimum necessary expenditure for a husband 
and wife with three children in 1899 was 21s. 8d., or about $5.25 
a week. On this basis, and making allowance for families of 
different sizes, he arrived at the startling conclusion that almost 
twenty-eight per cent of the total population were living in 
poverty, — that is, in receipt of an income insufficient for the 
maintenance of mere physical efficiency. This was a striking 
and unexpected confirmation of the conclusions by Booth in 
his magnificent study of economic and social conditions in 
London, that thirty per cent of the London population lived in 
poverty, below the necessary minimum. 

The unfortunate individuals within the poverty line are 
wretchedly housed, inadequately clothed and underfed. The 
results show themselves directly in the far higher average death 
rate, the greatly increased infant mortality, and the marked 
inferiority in height, weight and general physical condition. 
Of the indirect influences on industrial efficiency, on national 
character and on moral development it is not necessary to 
speak. 

The conditions in London and "York may be taken as fairly 
typical of those in modern British industrial towns. Similar 
comprehensive data for the United States are lacking, and only 
the beginnings of scientific investigation have been made. 



678 



Poverty and Progress 



[§2s: 



The conservative conclusions of Dr. Streighthoff are to the effect 
that in 191 2 at least half of the males aged sixteen or more, 
engaged in gainful occupations were earning less than $625 a 
year, and the Federal Report tells us that in the New England 
mills nearly one-third of the men and two-fifths of the women, 
and in the Southern mills nearly one half of the men and over 
two-thirds of the women, were earning less than six dollars a 
week. And this in face of the fact that the minimum living 
wage was estimated in 191 2 for the country at large at over $600 
a year, and for the city of New York at from $800 to $1000. 
While detailed figures are still lacking, no one who is conver- 
sant with social conditions in large American cities can doubt 
that if in prosperous England over a quarter of the urban popu- 
lation is below the poverty line, and another large part scarcely 
above it, the situation is not fundamentally different in the 
industrial portions of America. It is true that only one-third of 
the population live in cities as against two-thirds in England, and 
it is indisputable that the American standard of life is higher. 
But whether it is thirty per cent or only fifteen per cent of the 
American urban population that is submerged below the pov- 
erty line, the fact that in our much vaunted modern civilization 
there should be millions of human beings who do not possess 
an income adequate for bare physical efficiency is sufficiently 

appalling. 

257. The Causes of Poverty 

The causes of poverty are sometimes classified as individual 
and social, or the result of misconduct and of misfortune. In 
the first category are put such phenomena as intemperance, 
habitual indolence, sensuaHty, gambling, ignorance, shiftless- 
ness and improvidence. This classification, however, is erro- 
neous for a double reason. 

In the first place, very little permanent poverty can be as- 
cribed to any or all of these so-called individual causes alone. 
They are almost without exception found in conjunction with 
some of the so-called social causes, and it is virtually impossible 



§ 257] The Causes of Poverty 679 

to segregate them and to estimate their relative importance 
separately or as a group. Secondly, the distinction between 
individual and social causes has been much weakened by natural 
science as well as by economics and sociology. Many of the 
so-called personal traits, for instance, have been shown to be 
the result of heredity'', as in the famous families of the Jukes and 
the Ishmaels, every member of which to the number of several 
hundreds was infected by the family taint. Still more im- 
portant, however, is the fact that the personal and non-hereditary 
characteristics of the individual are in large measure the result 
of his environment. It is a familiar fact that individual ethics 
are modified by social ethics; it is not always appreciated that 
intemperance, vice, ignorance and improvidence are to a very 
great extent the consequence of economic and social surround- 
ings. If it be said that intemperance produces poverty, it may 
equally well be said that poverty breeds intemperance. What 
could be more startling than the well-authenticated fact that 
in many cities a large percentage of the unfortunate women whom 
we associate with the term social evil are reduced to ply their 
vocation by poverty alone? It is indeed true that no matter 
how ideal the general economic conditions may be, there will 
always be some individuals who will sink to the bottom; and it 
is this to which the Bible no doubt refers when it tells us: ''The 
poor always ye have with you." But to suppose, as some of the 
prosperous and cynical well-to-do are wont to assume, that this 
kind of poverty forms any conspicuous part of the whole is 
preposterous in the extreme. 

A better classification is that into immediate and ultimate 
causes of poverty. In Rowntree's careful investigation it was 
found that where the family earnings (all of them expended on 
the bare necessaries of life, and not including other useful or 
wasteful expense) were insufficient for mere physical efficiency, 
the immediate causes were as follows: death of chief wage- 
earner, 15.63 per cent; illness or old age of chief wage-earner, 
5.11 per cent; irregularity of work, 5.14 per cent; size of family, 



68o 



Poverty and Progress 



[§257 



22.15 per cent; regular but insufficient wages, 51.96 per cent. 
So far as the size of the family is concerned, the poverty line was 
constructed on the basis of a family of three children. Had a 
larger family been selected as the average, the numbers living in 
poverty would naturally have been correspondingly increased. 
But while a larger family would involve a condition of greater 
poverty, it is interesting to note that this means not continuous 
poverty, but alternating periods of dire want and comparative 
comfort. The life of the ordinary unskilled workman may be 
divided into several periods. During childhood he will be apt 
to live in poverty until he as well as his brothers and sisters begin 
to contribute to the family income. He will then be in a position 
to save and may continue to do so after marriage. When, 
however, more than two or three children arrive, he will again 
fall below the poverty line and remain there until most of the 
children are old enough to earn something. Then commences 
the second period of less acute privation which continues until 
the children marry and leave him in old age, when he for the third 
time falls below the poverty line. This situation can be illus- 
trated in the following diagram: 

CHILDREN MARRY 
(^NDJ^VEJHOME; 

LABORER 
>PAST WORKj 



.MARRIES 



CHILDREN 
yBEGIN T O EARN; 




AGE 



20 25 



35 40 



50 55 



65 70 



Fronf> Ro.wntree^ "Poverty, A Study in Town Life." 



The startling fact, however, is that, even with an average 
family and regular work, over one-half of those living in poverty 
at any moment are reduced to that state simply because, not- 



§257] The Causes of Poverty 681 

withstanding the exercise of thrift, sobriety and care, the income 
is inadequate for support. 

When we ask what is the ultimate cause of poverty, it is at 
once obvious that no single reason can be separated from the 
others. Modern poverty is bound up with the facts of modern 
economic life, and modern economic life is a complex product. 
To select any characteristic feature of the present industrial sys- 
tem and to single it out as responsible for poverty is naive, but 
worthless. The Malthusian seizes upon redundant population, 
the communist upon private property, the socialist upon prop- 
erty in means of production, the single taxer upon property in 
land, the co-operator upon competition, the anarchist upon gov- 
ernment, the anti-optionist upon speculation, the currency re- 
former upon metallic money, and so on. They all forget that 
widespread poverty has existed in the absence of each one of these 
alleged causes. Density of population, private property, compe- 
tition, government, speculation, and money have each been ab- 
sent at various stages of history without exempting society from 
the curse of poverty. Each stage has had a poverty of its own. 

Nothing is more natural, but nothing is more fraught with 
danger, than to cast a halo over the past and to make of it a 
golden age. The poverty of to-day is sad and even heartrending, 
but to the student of economic history it is clear that in the 
older industrial countries at least, where alone a fair compari- 
son can be made, the poverty of to-day is less than it was a 
century ago, and far different from what it was in former ages. 
Even the socialists are now abandoning their contention as 
to the gradual pauperization of the mass of society, and are 
restricting themselves to the complaint that the workman is not 
securing a fair share of the undoubted increase of wealth. More- 
over, at the present time there is bitter poverty in India, a 
country without the modern industrial system; and still more 
acute destitution among savages who are ignorant of property in 
land. The causes of poverty are as complex as the causes of 
civilization and the growth of wealth itself. 



682 Poverty and Progress [§258 

258. The Relief of Poverty- 
All remedies for poverty fall into one of two classes, — the 
palliative and the curative, — the endeavor to relieve poverty 
and the attempt to prevent poverty. The distinguishing feature 
of modern life is the growth of a public sentiment which seeks 
to cope with the evils of poverty from both points of view. 

The relief of poverty has taken the forms of private and 
public relief. Private charity, again, has been either individual 
or institutional. We thus have the three classes of individual 
relief, private institutional relief and public relief. 

(i) Individual charity, while incontrovertibly of great weight 
in special cases, is often likely to be of ethical importance to 
the bestower rather than of economic benefit to the recipient. 
Experience has shown that indiscriminate personal charity is 
frequently ill-advised, because it is the result only of the heart 
rather than of heart and head combined. The consequence is 
that it is just as likely to perpetuate as to relieve beggary and 
pauperism. The realization of this fact has led to the replace- 
ment, or at all events to the supplementing, of personal by 
institutional relief. 

(2) Institutional private relief is exemplified by the char- 
itable agencies like benevolent societies, relief and aid societies, 
associations for improving the condition of the poor, fatherless 
and widows' societies, and societies for promoting frugality and 
repressing mendicancy. Above all, however, we must signalize 
the charity organization societies which have been rapidly de- 
veloping during the last half-century. These are endeavoring 
to substitute scientific principle for hap-hazard action, and 
have done not a little to direct the stream of generosity into 
the right channels. Pauperism, however, either brings in its 
train or aggravates many other distressing evils such as the 
various forms of disease, unsanitary homes, dependent chil- 
dren, and liability to economic and legal exploitation. Num- 
berless, therefore, are the modern institutions like private 



§ 258] Relief of Poverty 683 

hospitals, dispensaries, sanatoria, anti-tuberculosis leagues, 
improved dwellings and model lodging-house companies, 
orphan asylums, creches, kindergartens, juvenile homes, fresh 
air funds, retreats for the aged, the convalescent and the in- 
curable, provident loan societies, employment agencies, wood- 
yards and laundries, industrial colonies, legal aid societies, 
peoples' palaces and the like. Bewildering in their complexity, 
the proper management of these philanthropic agencies has 
become a distinct profession and the subject of a separate dis- 
cipline, with a stupendous literature of its own. 

In former times institutional philanthropy was to a large 
extent religious in character. All the great religions of the 
world have inculcated the virtue of benevolence, and not the 
least contribution of Christianity consisted in the new spirit of 
universal brotherhood and charity which it infused into the 
pagan European world. During the major portion of the 
middle ages, in fact, the charities of the church were virtually 
the sole embodiments of organized philanthropic activity. It 
was only after the Reformation, when the property of the church 
and of many of the religious orders was "secularized," that the 
need of some form of public relief was recognized. 

(3) The most important illustration of public relief is that 
known as the Poor Law System. In England, after the con- 
fiscation of the guilds and chantries during the sixteenth cen- 
tury, the bishops were admonished to exhort their parishioners 
to more liberal gifts for the poor. As these exhortations grad- 
ually lost their efficacy, it was finally provided that in case of 
contumacy the justices of the peace might order an assessment. 
Thus did the voluntary contributions gradually change into 
compulsory payments, — a process which may be observed in 
the history of all taxation. In 1601 a general assessment was 
levied for the support of the able-bodied and impotent poor. 
In 1662 the settlement act was passed, designed on the one 
hand to increase the facility of relief, but on the other to limit 
it strictly to native inhabitants of the locality. The act of 1722 



684 Poverty and Progress [§258 

authorized the building of workhouses, and the withholding of 
relief from those that refused to enter. Gilbert's act of 1782 
directed the local authorities to find for the unemployed poor 
work suitable to their requirements and in the proximity of 
their homes. The system reached its climax in the act of 1796, 
when Parliament followed a similar resolution of some justices 
of the peace who had assembled at Speenhamland in the pre- 
ceding year and authorized outdoor relief for the necessitous as 
a substitute for the now discredited workhouse test. 

It was at one time the custom to ascribe a disproportionate 
influence to the poor law. The English system was undeniably 
a direct premium on improvident marriage and lack of frugal- 
ity. But the oft repeated assertion that it impoverished the 
comfortable and perpetuated the miserable is clearly an ex- 
aggeration. The situation at the close of the eighteenth and 
beginning of the nineteenth centuries was indeed deplorable; 
but, as we know, it was very largely the result of the abuses 
connected with the transition from the domestic to the factory 
system. The poor law played its part, but after all a relatively 
inconspicuous part, in maintaining the degradation of the 
working classes. In the same way the great reform of the poor 
law in 1834, by which outdoor relief was abolished, was only 
one of the many ameliorative movements which revolutionized 
the condition of the laborers in the second quarter of the cen- 
tury, such as the abolition of the conspiracy acts, the passage 
of the factory laws, the repeal of the corn laws, the 'reform 
of taxation, and the growth of democracy. The old poor law 
did not create English poverty, and the new poor law did not 
abolish it. 

In the United States, where pauperism has been for obvious 
reasons less acute, the two salient features of the poor-law sys- 
tems have been the almshouse and outdoor relief. Public out-. 
door relief, however, has been substantially abolished in some 
of the larger Eastern cities, like New York, Philadelphia, Balti- 
more and Washington, with distinctly good results. A consider- 



§259] Prevention of Poverty 685 

ation of the relative merits of public and private relief, which 
is becoming the subject of warm discussion in many parts 
of the United States, would however lead us too far astray; 
for the controlling considerations are not primarily economic 
in character. • ' 

259. The Prevention of Poverty 

We have seen that there is no single cause of poverty; there 
can accordingly be no single preventive of poverty. The naive 
and simple remedies that are commonly advanced may be re- 
duced in their practical operation to two, — a diminution of 
population and a diminution of wealth. 

After the discussion in chapter iv. the suggestion that pov- 
erty can be abolished by checking population scarcely needs 
any further comment. Human beings are producers as well 
as consumers, and under proper conditions an increase of 
population may be entirely compatible with an increase of 
general wealth. Nothing is more indisputable than that num- 
bers have increased and relative poverty has decreased in 
many modern countries. 

The diminution of wealth, on the other hand, is in itself 
never advanced as a remedy, for that would be too obviously 
absurd. But all the other naive remedies for poverty are prac- 
tically tantamount to this. To the attentive reader of the 
preceding chapters it should be abundantly clear that private 
property and individual initiative have been the motor forces 
of the accumulation of wealth and the real progress of humanity. 
Anything therefore which seriously saps these foundations neces- 
sarily undermines not only the whole structure of industrial 
society but the edifice of civilization itself. Anarchism would 
abolish government, but in so doing would rob society of the 
fundamental protection which enables it to exist in peace. 
Communism would level distinctions of wealth, but in eliminat- 
ing private property would destroy progress. The restriction 
of large fortunes by taxation, by direct prohibition or by limita- 



686 Poverty and Progress [§ 259 

tion of bequest might seriously impair the spirit of enterprise. 
Socialism, which would abolish private control of production, 
would in the present condition of the human race necessarily 
diminish production. Socialism is virtually co-operation; and 
the true co-operative spirit is wofully lacking in the mass of 
mankind. There are indeed conspicuous examples of wealthy 
socialists, but they have been for the most part men of lofty 
idealism who would have played an equally prominent part in 
the reform rather than the reconstruction of modern industry. 
If the rank and file of men were ethically as advanced as are 
many of the socialist leaders, there would be no need of reform. 
Socialism assumes that mankind is ready for the self-abnegation 
implied in the very idea of the public and co-operative activity 
which is to include the whole of productive enterprise. History 
and psychology alike teach us that this grossly underrates the 
importance of the economic motive. When the world is ready 
for socialism, socialism will be unnecessary. In the mean time 
any serious encroachment of socialism would inevitably bring 
with it a slackening in the pace of accumulation; and in the 
long run a diminution of wealth cannot mean a diminution of 
poverty. 

To say, however, that poverty has always existed is no reason 
for believing that it should continue forever to exist. Absolute 
equality of conditions is indeed an iridescent dream, for it runs 
counter to the inequality or differentiation which is the law of 
all life and the explanation of all change. But if the preceding 
discussions in this volume have emphasized any one point it 
is the fact of the progressive intermingling of the individual and 
social points of view, — the interpenetration, as it were, of the 
individual by the claims of society, and on the other hand the 
infusion into the collective activity of some of the surplus energy 
which must always continue to find its tap-root in the efforts 
of the individual. Translated into economic terms, this means 
that the modern industrial system is slowly producing not only 
political democracy but economic democracy, and that eco- 



§ 259] Prevention of Poverty 687 

nomic democracy is incompatible with permanent and wide- 
spread poverty. 

This does not imply that economic forces alone and directly 
are creating a millennium, or that the political ideal is laissez- 
faire. Government and the public sentiment behind it are 
in a sense the outgrowth of the economic situation; but, as 
we have learned, they are also potent factors in modifying the 
situation. Economic, political and ethical forces are conspiring 
to bring about progress by raising the social level. In ordinary 
business life this means the gradual but clearly discernible 
elevation of the standard of commercial morality. So far as 
poverty is concerned it means the lifting of the standard of life 
of the laborer and the setting, in ideal at least, of an irreducible 
minimum, below which national production is not worth having. 
Practically this process assumes the varied forms of trade-union 
activity, of education of the unskilled, of factory legislation, of 
social insurance, of workmen's compensation, of improved 
housing, of trade agreements, of control of monopoly and above 
all, of the curtailment of special privileges. The process is a 
slow one, because it is an arduous task to make the successful 
and self-satisfied business man realize that the true ultimate 
interests of his class are associated with the increased consump- 
tion that can come only from the higher standard of life of the 
mass of the producers. It is in the last instance public opinion 
alone which in a democracy can protect the well-intentioned 
and long-sighted employer from the unfair competition of his 
unscrupulous and selfish rivals. 

The way, therefore, to have progress without poverty is not 
to level down but to level up; to do nothing which will pre- 
vent the capable, the resourceful and the daring from exerting 
their skill and inventive ingenuity; but, on the other hand, to 
keep open the door of opportunity for all and to throw about 
the mass of the less fortunate and the less gifted the protect- 
ing mantle of a public sentiment which will be intolerant of 
injustice, and which will insist upon the creation of conditions 



688 Poverty and Progress [§260 

that insure to every worthy human being at least the possi- 
bility of a worthy human existence. 

260. The Future of Economic Life 

» 

We come finally to the questions which at the close of such 
a study as this inevitably force themselves upon us: Whither 
are we tending? What lessons have an economic interpretation 
of the past and of the present to teach us in our guidance for 
the future? What are the forces that are making for progress 
or retrogression? 

There is no blinking the fact that many give a pessimistic 
answer to these queries: they call attention to the increase of 
luxury and materialism; they look with suspicion upon what 
they term the growing plutocracy and the new feudalism; 
they point to the warning example of the oriental monarchies, 
of classic Greece and Rome, and tell us that in our case, too, 
the period of prosperity which is now upon us will be followed 
by one of decay and final dissolution. What has been will be: 
there is nothing new in human affairs. 

Yet a discriminating study of the considerations set forth in 
this volume should preserve us from so gloomy and despondent 
an attitude. The three factors of importance to which all 
that has preceded may be reduced are : the growth of industrial 
capital, the internationalism of science, and the emergence 
of the democratic ideal. 

(i) In ancient Rome, as in feudal Europe and colonial 
America, the conditions of landholding played a dominant 
role. The control of the trade routes was the chief factor in 
the rise and fall of the oriental monarchies, of the Greek city 
states, of the Italian and German towns, of Portugal and 
Spain. The distinguishing mark of modern times, on the 
other hand, is the existence of industrial capital. We speak 
glibly of the recent progress of science, but few realize the 
true import of this growing subjection of nature to man, and 
of the revolutionary character of this harnessing of the powers 



§ 26o] The Future of Economic Life 689 

of the universe to the yoke of the human intellect. For one 
thing, it has made possible an almost limitless increase in 
production. Landed capital, under the unscientific methods 
of the past, was able to go so far and no farther. The advent 
of commercial capital indeed increased prosperity, and to the 
extent that exchange is really a phase of production, augmented 
the productive power of the world. But here, again, its efl&cacy 
was confined within narrow bounds. Creating new values 
simply by the bartering of existing values, the pyramid of 
wealth rested on the basis of the actual production within each 
community, and could not be piled up beyond a certain height. 
But with modern industrial capital and the snatching from 
nature of her intimate secrets, the utilization of natural re- 
sources within each country has become almost boundless, 
and provides an ever-broadening base for the benefits of trade 
and commerce. 

It is for this reason alone that the history of the world in 
the future is to be so different from the past. In former times, 
after a certain point had been reached in agriculture and com- 
merce, human ingenuity was powerless to do more than divide 
existing wealth; and with this fixed limit to production, it is 
no wonder that each civilization in turn should have attempted 
to secure the prize for itself. Hence the rise, the glory and 
the decline of nations. In future, however, in lieu of dividing 
existing wealth, each nation which lives up to its opportunities 
will be able to create new wealth. Important as will continue 
to be the land question and the trade relations, the secret of 
ultimate success is to be sought in the fundamental conditions 
of industrial enterprise at home; and with the growth and 
control of industrial capital there need be no limit to the con- 
tinuous march of wealth and progress. 

(2) Science is not only boundless in its possibilities, but im- 
partial in its activities. Science transcends all national lines. 
Never again will a country be able to achieve or to retain a 
monopoly of industrial advantages. For the time being, in- 
44 



690 Poverty and Progress [§ 260 

deed, climatic conditions or racial characteristics may give 
one nation a temporary preponderance in some particular cat- 
egory of production; but with the overwhelming importance 
of new industrial methods, applicable impartially to all natural 
forces, the advantage cannot be permanently retained. 

We are accustomed to speak of the changes brought about 
by the alteration in the media of transportation and the growth 
of the world market; we do not yet realize the full implications 
of the industrial revolution. Rightly conceived, it means the 
coming internationalism of mighty empires in friendly com- 
petition with each other, not for the division of what exists, 
but for the utilization of what can be made to exist. For the 
immediate future, indeed, while nations are still in unequally 
developed stages of industrial growth, and while there remain 
extended markets not yet on the highroad to industrial pre- 
dominance, there will still be some room for the nationalism 
of the old type with its protective features and its commercial 
rivalries. In these contests we must undoubtedly take our 
part. But with every decade's progress in science the condi- 
tions will change, and the old nationalism of exclusiveness will 
melt into the new cosmopolitanism based upon the continual 
progress of each great and economically homogeneous community. 

(3) The final point of difference — the flower and fruit of 
all its forerunners — is the existence of the democratic ideal. 
We point, indeed, with complacency to the advance made by 
the skilled members of the working class, but to those who 
realize the essential conditions of successful democracy, where 
the mass of citizens are necessarily the laborers, the ideal to be 
attained advances still more rapidly than the actual progress. 
The brutish, lethargic peasant of the old world is, perhaps, 
content with his crust and his misery. The free citizen of the 
modern industrial state wants, and wants justly, to participate 
in the spiritual as well as the material benefits of modern civil- 
ization. With every advance in his economic position, due to 
the interplay of modern industrial forces, new vistas of possi- 



§ 26o] The Future of Economic Life 691 

bilities disclose themselves, new sources of legitimate satisfac- 
tion make their appearance. The social unrest of to-day, 
with all its disquieting and regrettable incidents, is on the 
whole a salutary symptom. It is but the labor pains in the 
birth of the new industrial order which has been in the making 
for the past few generations, and of which the faint outlines 
are even now discernible. 

This new industrial order depends, however, on the emer- 
gence of a healthy public opinion. In antiquity political and 
social opinion was a class opinion. In the middle ages the 
incoherent public opinion was intolerant to competition. In 
modern times the progress of economic thought and the pres- 
sure of economic fact in uplifting the hitherto submerged classes 
of the community are generating a public opinion which frankly 
recognizes the benefits of a healthy competition, but which 
insists more and more on an effective social control of compe- 
tition to the end that it be elevated and purified. 

A study of the econom'c forces now at work therefore jus- 
tifies a reasonable hopefulness. The productive powers of 
society are augmenting at such a prodigious rate that we need 
no longer apprehend a decay of general prosperity or of national 
power. There is to be no further irruption of the barbarian, 
because there will soon be no more barbarians. There is to be 
no swinging back of the pendulum of civilization, because under 
the influence of the new economic forces only those nations 
can succeed that understand how to utilize industrial capital; 
and this comprehension implies an ever-ascending stage of 
civilization. There is to be no domination of each people in 
turn over all the others, because of the internationalism of 
science and the impartial territorial diffusion of industrial 
agencies. And within each nation, while the rich are un- 
doubtedly getting richer and while poverty still stalks abroad, 
the poor are not getting poorer. The creation of a more equa- 
ble, because a more complete, competition through the develop- 
ment of the system of collective bargaining and the curtailment 



692 Poverty and Progress [§ 261 

of all special privileges; the recognition on the part of the 
public that lasting prosperity depends not only on the con- 
servation and free play of capital, but also on the gradual ele- 
vation of the laborer from a cheap man to a dear man; the 
coming social control of competition itself in the interests of a 
more enlightened and hence really freer rivalry, — all these 
will inevitably tend to secure to each class in the community 
its proper share in the national dividend. 

261. The Role of Economics 

Economics, then, has a progressively important role to play 
in the future. We thus come at the end to the position from 
which we started out. With the commanding significance of 
the economic life in its influence on social progress, econom- 
ics, in pointing out exactly what is, must necessarily concern 
itself with what ought to be. If the economic student is the 
real philosopher of social life, he will take a more notable part 
in future speculation and future legislation. The various social 
classes, by reason of their very being, see only the particular, 
not the general,. interests. The farmer understands the work- 
ings of Wall Street, and the factory hand comprehends the 
condition of the world market, as little as the capitalist real- 
izes the true ideals of the laborer. To let any one class act as 
spokesman for the other is pregnant with danger. The eco- 
nomic student, if he is worthy of his calling, will proceed with- 
out fear or favor; he will be tabooed as a socialist by some, 
as a minion of capital by others, as a dreamer by more. But 
if he preserves his clearness of vision, his openness of mind, 
his devotion to truth and his sanity of judgment, the deference 
paid to his views, which is even now beginning to be apparent, 
will become more and more pronounced. The influence of 
economic conditions on economic theory has been, let us hope, 
abundantly demonstrated; but the reciprocal influence of 
economic thought on actual conditions is in danger of being 
overlooked. As the science itself becomes more and more 



§ 26i] The Role of Economics 693 

complete, it will be in a better position to apprehend and to 
explain the real content of existing conditions and the true 
method of making the actual conform to the ideal. Economics, 
which is to-day only in its infancy, and which is of all disci- 
plines perhaps the most difficult and the most complicated, is 
indeed interlaced with and founded upon the actual condi- 
tions of the time; but like natural science the economics of 
the future will enable us to comprehend the living forces at 
work, and by so doing will put us in a position to control them 
and to mould them to ever higher uses. Economics is there- 
fore both the creature and the creator. It is the creature of 
the past; it is the creator of the future. Correctly conceived, 
adequately outlined, fearlessly developed, it is the prop of ethi- 
cal upbuilding, it is the basis of social progress. 



INDEX 



INDEX 



^BRASION, 472. 

Accidents, laws regarding, 647. 

Advances, 504, 509. 

Agricultural stage of private property, 
128. 

Agricultural credit. Federal Farm 
Loan Act, 546*. 

Agriculture, possibilities of, 44, 45; 
in early period of American eco- 
nomic life, 10 1 ; in America since 
the Civil War, 103-106; extensive 
and intensive, 308, 309, 315, 316; 
stages in, -313-316; migratory, 
313. 314; surface tillage, 314; sta- 
tionary, 314; alternating, 315; 
two-field system, 315; three-field 
system, 315; open-field or inter- 
mixed system, 315; convertible, 
315; rotation of crops or diversified 
farming, 315; enclosures, 315; capi- 
talistic farming, 316; in the United 
States, 316; large-scale, 338-341; 
combination eliminated in, 350. 

Aldrich-Vreeland Bill, 539. 

America, early period of economic life 
of, 100-102; growth of industry in 
nineteenth century in, 102-104; 
recent development of industry in, 
104-106; modern problems of, 106- 
108. 

American system, the, 102. 

Anarchism, 685. 

Annuities, 409, 410, 603, 604; ton- 
tine, 604. 

Apprenticeship, trade union restric- 
tion of, 167, 168, 436, 437. 

Arbitrage, 361. 

Arbitration, 446-448. 

Aristotle, no, 138. 

Arnold, Matthew, 203. 

Associated and corporate enterprise, 
96-99. 

Auction sale, 231, 232. 

Austria, money standard in, 483. 



gAGEHOT, WALTER, 512, 514. 
Balance of bargain, 117. 

Balance of trade, 117, 549-552, 560. 

Bank certificates, 500. 

Bank drafts, 500. 

Bank notes, 505 ; steps to insure safety 
of, 521- 525; public or private issue 
of, 521, 522; right of issue of, 523, 
524; monopoly of issue of, 523; de- 
centralization of, 524; character of, 
524, 525; denominations of, 525; 
regulation of, 525-528; French, 
Swiss, Dutch, English, and German 
systems of issue of, 527, 528; Ameri- 
can systems, 528-533; under the 
Federal Reserve Act, 540, 541. 

Bank of England, 522, 523. 

Bank of France, 522. 

Bank rate, 516-518. 

Bank reserves, 51 1-5 18; character of, 
5 1 1-5 13; single and multiple,. 512; 
combined, 512; composition of, 513, 
514; amount of, 514-516; protec- 
tion of, 516-518. 

Bank restriction, 493. 

Banking, Credit and, ch. xxx, 496- 
520; development of, 501-506; 
foreign systems of, 527, 528; Amer- 
ican systems of, 528-533; general 
asset, 529; Suffolk system, 529; 
safety-fund system, 530; bond-de- 
posit system, 530. 

Banking principle, 526. 

Banks, origirl of, 97; derivation of 
word, 501; money dealings of, 501, 
502; credit transactions of, 502- 
506; early, 502, 503; private, 502- 
505; in Venice, 502, 503, 509; trans- 
fer, 503; in Amsterdam, 503, 504, 
509; giro, 503; savings, 503; deposit, 
504; loan, 504, 505; of discount, 
505; of issue, 505, 521-525; first 
government, 505; syndicate and 
promoting operations of , 506; state, 



697 



698 



Index 



522, 524, 532; federal reserve, 539- 
543; national, 515, 524, 530-533; 
wild- cat and coon-box, 529; Suf- 
folk, 529; safety fund, 530; farm 
land, 546*. 

Barrator, 76. 

Barter, 68, 76, 87, 227-229. 

Basing point system, 592. 

Bequest, right of, 137. 

Billeter, G., 406. 

Bills, foreign, 554; documentary, 554; 
finance, 554. 

Bills of exchange, 499. 

Bimetallism, 68, 476, 479-483. 

Biology, relation of economics to, 30. 

Birth rate, 57-59, 61. 

Blacklist, 440. 

Bodin, 116. 

Bond deposit system, 530. 

Bonds, 330, 331. 

Bonus plan, 445. 

Booms, 361. 

Bottomry loans, 602. 

Bounties, 629-631. 

Boycotts, 441-443. 

Brassage, 471. 

Bucher, C, 90. 

Bucket-shops, 367. 

Business, 4, 85. 

Business enterprise, 85-89. 

Buyers and sellers, 229-235. 

Buyer's monopoly, 231. ' 

By-products, 254. 

(^AIRNES, J. E., 158, 465, 548. 
Call loans, 397, 536-538. 

Canals, 575, 620. 

Capital, ch. xxi, 317-332; and income, 
15-19; traditional definition of, 17; 
. origin of term, 17; as capitalized 
income, 17, 18, 209, 404; as con- 
trasted with income, 18; chief 
function of, 18; measure of wealth, 
19, 21; appearance of, on a large 
scale, applied in industry, 81; in 
classic antiquity and in modern 
times, 84; combinations off 168; 
composed of pieces of capital, 215, 
216; marginal efiiciency of, and in- 
terest, 266, 267; as a factor of 
production, 283-285; and land, 
as factors of production, 304- 
307; consumption, 317; lucrative or 



acquisitive, 317; production, 317; 
fixed and circulating, 318, 319; 
active and passive, 319; agricul- 
tural, 319; land or landed, 319; 
commercial, 319; industrial, 319; 
financial, 319, 320; productivity of, 
320-326; function of, 320-325; as 
basis of roundabout production, 
320, 321; creation and growth of, 
323-326; as foundation of civiliza- 
tion, 323, 324; as available stock of 
wealth, 325; nature and influence 
of, 326-329; characterized by mass 
production, uniformity, and inter- 
changeability, 327, 328; investment 
of, 329-332; concentration of, 335; 
as a homogeneous fund, 395-397; 
can never become costless, 407- 
410; monopoly of, and wages, 428; 
reserve, 511; industrial, growth of, 
688, 689. 

Capital value, 17, 206-209, 211, 220- 
223, 399- 

Capitalist economy, 81-84. 

Capitalists, rise of, 81; and laborers, 
289. 

Capitalization, of rent, 218; rate of, 
220; and efficiency, 268, 269; and 
trusts, 276; and crises, 545, 546. 

Capitalization of Value, The, ch. xiv, 
204-222. 

Carey, H. C, 280, 561, 565. 

Cartel, 343. 

Cash credits, 508. 

Cash-items, 513. 

Cash reserves, 513. 

Cernuschi, M., 476. 

Certificates, coin, 488; gold, 489; sil- 
ver, 489; of deposit, 500; clearing 
house, 510, 512. 

Character and Factors of Production, 
ch. xviii, 278-287. 

Charity, individual, 682; institutional, 
private, 682; institutional, public, 
683-685. 

Chattels, 127. 

Check system, 500, 509, 510. 

Child labor, 287, 643-646. ^ 

Civilization, 15. 

Clan, the, 85-87. 

Clark, J. B., 124, 185. 

Clark's law, 185-188. 

Class competition, 143, 144. 



Index 



699 



Class legislation, 566, 568. 

Classic antiquity, economic theory in, 
109-112. 

Classification, railway, 584-587. 

Clearing house, 510, 511. 

Clearing house certificates, 510, 512. 

Climate, efifect on economic life, 38- 
40; the altering of, 43, 44. 

Clipping, 472. 

Closed shop, 439. 

Coin, in early middle ages, 477; gold 
and silver, 477-483. 

Coinage, 619. 

Coinage problems, 470-475. 

Combination, 152; of labor, 299-301; 
successive, 300; simultaneous, 300; 
advantages of, 345, 346; causes of, 
347; growth and extent of, 347- 
349; limits of, 349-351- 

Commerce, 46, 83. 

Commercial economy, 77-81. 

Commercial paper, discount of, 540. 

Commission work, 94. 

Commodities, the term, 9, 10; and 
services, 10; speculation in, 362; 
contrasted with laborers, 415, 416, 
422. 

Commodity competition, 141, 142. 

Communication, effect of improve- 
ments in, 48. 

Communism, 65, 128, 129, 136, 613, 
68s, 

Comparative costs, law of, 226, 
227. 

Comparative marginal utilities, law 
of, 227. 

Competition, ch. x, 139-153; 68, 136, 
230, 234-238; rise of, 82; nature 
of, 139-141; group, 139, 140; 
relation to progress 141, 144, 
145; forms of, 141-145; com- 
modity, 141, 142; individual, 
142, 143; market, 143; class, 143, 
144; race or national, 144, 145; dan- 
gers of, 145-147; brute and human, 
145-147; cut-throat, 146, 147; lim- 
its of, 147-150; fair and vmfair, 148; 
substitutes for, 150-153; sometimes 
harmful, 349; hard to prevent, 350; 
unfair, forms of, 632, 633; and 
trusts, 635, 636; unfair, prohibition 
of, 63,8-641; between railways, 579, 
S8o. 



Concentration, of population, 52-54; 
meaning of, 333-335; kinds of, 334, 
33S; of labor, 335; of land, 335; of 
capital, 335; of employment, 335. 

Concentration of Production, The, 
ch. xxii, 333-351- 

Conciliation, 446-448. 

Consolidation, 341-345; of railways, 

579- 

Constant returns or cost, law of, 253. 

Consumer's rent, 195. 

Consumer's surplus, 194, 195. 

Consumption, freedom of, 168, 169; 
relation of social surplus to, 201- 
203; relation of production to, 278- 
281, 286. 

Contract, freedom of, 169, 170. 

Control of Trusts, The, ch. xxxvi, 
632-642. 

Co-operation, 140, 151, 152, 443-446. 

Co-operative societies, 151, 446. 

Copyrights, 153, 369, 391. 

Corner, 361, 362. 

Corporate and associated enterprise, 
96-99. 

Corporate finance, 331. 

Corporation problem, 98. 

Corporations, 97-99; taxation of, 269, 
270; regulation of, 273-275; signifi- 
cance of, 329, 330; holding, 344, 345. 

Cosmopolitanism, theory of, 1 18-120. 

Cost, meaning of, 189-192; and price, 
190; as equivalent to pain, 190, 191: 
individual and social, 192-194, 197, 
198; marginal, equivalence with 
marginal utility, 192; and surplus, 
194-198; depends on reciprocal de- 
mand, 196; social, equivalence with 
social utility, 197, 198; and utility, 
198-201; of reproduction, 245, 246; 
equivalence between individual and 
social, 246; law of marginal or 
maximum, 247-249; marginal, as 
determining normal price, 248-251; 
law of minimum, 249-251; law of 
varying, 251-253; constant and 
uniform, 251-253; increasing, law 
of, 252; diminishing, law of, 253; 
joint, law of, 253-255; of replace- 
ment, 274; of labor, 289-291; rela- 
tion to wages, 289; measured by 
efficiency, 290, 291; and rent, 378- 
381; and wages, 416-418. 



JOO 



Index 



Cost of production, 244-247; relation 
to normal price, 245; meaning of, 
245; defined, 247; relation to joint 
cost and individual cost, 255; and 
value, in privileges, etc., 262-264; 
and price, 265, 266. 

Cost theory, of wages, 417; of money, 
460, 461. 

Costs, comparative, law of, 226, 
227. 

Cournot, A. A., 30. 

Course of interest, 405-407. 

Crafts, 92. 

Credit, 450, 455; becomes integral 
part of production and exchange, 
82; nature and forms of, 496-501; 
commercial, 498-500; industrial, 
500, 501; agricultural, 500,546*; 
financial, 500, 501; and prices, 518- 
520; and crises, 543-546. 

Credit and Banking:, ch. xxx, 496- 
520. 

Credit and Currency, ch. xxxi, 521- 
546. 

Credit economy, 68. 

Credit transactions of banks, 502-511. 

Crises and credit, 543-546. 

Cropping system, 388. , 

Currency, Credit and, ch. xxxi, 521- 
546. 

Currency principle, 525, 526. 

Currency question, 107. 

Custom, 150, 151. 

Custom system, 91, 94. 

Customs tariS, 557. See Tariff, 
Protection, 

]3 ANBURY HATTERS, 442, 443- 
Death rate, 58-61. 

Debasement, 472, 473. 

Deductive and inductive methods in 
economic investigation, 28, 29. 

Demand, and supply, 199, 223, 224, 
255j 256, 416; reciprocal, law of, 
227; normal, 241-244; elasticity of, 
241-244; joint, 243, 244; of money, 
454-456. _ 

Demand price, 238. 

Democracy, 686, 687. 

Democratic ideal, emergence of, 688, 
690, 691. 

Demolins, E., 42. 

Density of population, 49-52. 



Department stores, 651. 

Deposits, 502-504, 507, 508; and 

checks, 509, 510; importance of, in 

England and United States, 510. 
Depreciation, law of, 206-209, 211. 
Determination of Market Value, ch. 

XV, 222-240. 
Determination of Normal Value, ch. 

xvi, 241-261. 
Development, economic, of the United 

States, 100-108. 
Development of Economic Thought, 

ch. viii, 109-124. 
Deviation, 472. 

Differentia], value as a, 217-220. 
Differential rates, 589-593. 
Diminishing cost, law of, 253. 
Diminishing returns, law of, 63, 212- 

214, 252, 306, 308, 310, 346, 375, 

402, 419. 
Diminishing time and space utility, 

laws of, 210. 
Diminishing utility, law of, 175-179, 

212-214. 
Discommodity, 191. 
Discount, 505-507. 
Discount of commercial paper, under 

the Federal Reserve Act, 540. 
Discount rate, 516, 517. 
Discounting of future, 210. 
Discrimination, railway, 587-593; 

personal, 587-589; local, 587, 589- 

593- 
Distribution, classical theory of, in; 
theory of, 118, 120, 121; shares in, 
352-354; relation to production, 

353- 
Distribution of population, 50, 52, 

54-56, 57- 

Disutility, 190-192; marginal, 192. 

Division of labor, nature and advan- 
tages of, 293-298; social, 293-295; 
industrial, 295; technical, 295-297; 
territorial, 297, 298; defects of, 298, 
299. 

Divorce, freedom of, 165, 166. 

Documentary bills, 554. 

Domestic system, 93, 94, 96. 

Double standard, 476. 

Drafts, 499, 500. 

Dumping, 255. 

Dutch- auction system, 232. 

Dynamic normal value, 225. 



Index 



701 



gCONOMIC action, 12; liberty of, 
163-165. 

Economic activity, primitive, 85-87. 

Economic conditions, influence on 
density of population, 51. 

Economic development, 67-69. 

Economic Development of the United 
States, ch. vii, 100-108. 

Economic freedom, 119, 120, 155, 
163-170. 

Economic investigation, methods of, 
28, 29. 

Economic law, meaning of, 24-28. 

Economic Law and Method, ch. ii, 
24-36. 

Economic life, 3-6, 14; effect of climate 
on, 38-40; of geological formation, 
40; of flora, 41; of fauna, 41; of 
geographical location, 42, 43; the 
future of, 688-692. 

Economic man, 5. 

Economic margin, 177, 178. 

Economic motive, 4, 5. 

Economic progress, 18; bearing of 
Malthus's doctrine on, 62; classi- 
fication of, 74. 

Economic science, as opposed to 
economic art, 36. 

Economic Stages, The, ch. v, 67-84. 

Economic theory, in classic antiquity, 
109-112; mediaeval, 11 2-1 15; mer- 
cantile doctrine, 116-118; Adam 
Smith and the Ph3'siocrats, 118- 
121; Ricardo and modern econom- 
ics, I 21-124. 

Economic thought, development of, 
109-124. 

Economic value, 174. 
*^ Economics, definition of, 4, 7, 8, 13, 
14, 35; a social science, 6, 7, 179; 
origin of term, 8; often called science 
of wealth, 8; the true scope of, 23; 
relation to other sciences, 29-35; 
to psychology, 30; to biology, 30; 
to mathematics, 30, 31; to statis- 
tics, 31; to politics, 31, 32; to juris- 
prudence, 32, 33; to ethics, 33-35; 
scope of, 35, 36; pure and appHed, 
35. 36; the role of, 692, 693. 

Economy, barter, money, and credit, 
68; animal, vegetable, and mineral, 
'68; self-sufficing or isolated, 75-77; 
trade or commercial, 77-81; local 



or village, 78; capitalist or indus- 
trial, 81-84; national, 82, 83; inter- 
national, 83. 

Edgeworth, F. Y., 469. 

Education, factor in efficiency, 292. 

Efficiency, and value, 265-268; the 
measure of cost, 290, 291; of labor, 
292, 293; of combination, 345-349; 
and wages, 418-421. 

Egypt, money standard in, 482. 

Eight-hour laws, 597. 

Elasticity, of demand, 241-244; ■ of 
supply, 251-253. 

Electric lighting, 624, 625. 

Emigration, 60, 61, 166. 

Eminent domain, 136. 

Employers and workmen, 289.^ 

Employers' Hability, 657, 658. 

Employment, concentration of, 335; 
margin of, 403, 404; of women and 
children, 643-646. 

Enclosures, 315. 

England, money standard in, 478, 479; 
railways in, 594. 

Enterprise, ch. xxii, 333-351; the 
term, 85; associated and cor- 
porate, 96-99; carried on by 
individuals, 96, 97 ; by partnerships, 
97; by trusts, 97-99; quasi- public, 
149, 150; freedom of, 169, 170; as a 
factor of production, 284, 285; a 
species of labor, 284; meaning of, 
333- 

Entrepreneur, 85, 300. 

Environment, natural, 37-48; change 
of, 43-48. 

EquaHty, 148, 149, 163, 164, 170. 

Essartage, 314, 316. 

Ethics, 6; relation of economics to, 

33-35- 

Exchange, relation to wealth and 
value, 13; process of, 76; in mediae- 
val economics, 11 2-1 15; value in, 
182-184; ratio of, 184; conditions 
of, 226, 227; law of, 227; rate of, 
227-235; money as medium of, 449- 
451, 454-456; rate of international 
552-556; three-cornered, 552; at 
par, 553. 

Exchanges, stock and produce, 363- 
368. 

Exchequer notes, 490. 

Exogamy, 87. 



702 



Index 



Expenses, constant and variable, 253. 
Exports, balance of, over imports, 117; 

from the United States, 104, 105; 

relation to imports, 548-552. 

pACTORY law's, 644-648. 

Factory system, 94-96, 327, 328, 
336, 337, 627, 628. 

Family, the, 87-90, 96; matriarchal, 
86; patriarchal, 88. 

Fauna, effect on economic life, 41, 46. 

Federal Child Labor Act, 645. 

Federal Farm Loan Act, 546*. 

Federal Reserve Act of 1913, 538-543. 

Fees, 215. 

Feudalism, 130. 

Finance bills, 554. 

Fire, laws regarding, 647. 

Fisher, Irving, 469. 

Flora, effect on economic life, 41; the 
altering of, 45, 46. 

Food, and population, in Malthus's 
doctrine, 62-66. 

Forbearance, marginal, as determin- 
ing the rate of interest, 398-401. 

France, money standard in, 478-481. 

Fraternity, 165. 

Free coinage of silver, 470, 480-483. 

Freedom, ch. xi, 154-172; econo- 
mic, 119, 120, 155, 163-170; 
bodily, 155; with equality and 
responsibility, 163-165, 170; of 
marriage and divorce, 165, 166; 
of movement, 166, 167; of occupa- 
tion, 167, 168; of association, 168; 
of consumption, 168, 169; of pro- 
duction, 169, 170; of trade, 170; 
individual, as a social concept, 
171, 172. 

Free Trade, and MercantiHsts, 117, 
118; corollary of Ricardian doctrine, 
123; when harmful, 170; growth of, 
556-560; meaning of, 556, 557; on 
exports, 557; in Great Britain, 
559; arguments for, 566, 567; 
arguments opposed to, 560-565; 
criticism of arguments, 567-571. 

Freight rates, 577, 586-593.^ 

Fundamental concepts, ch. i, 3-23. 

Future, discounting of, 210. 

Future estimates, law of, 209-211. 

Futures, in commodity market, 363, 
365- 



QAIN sharing, 444, 445. 
Gas works, 624-626. 

General asset banking, 529. 

General Law of Value, The, ch. xvii, 
262-277. 

Gens, the, 86. 

Geographical location, effect on eco- 
nomic life, 42, 43. 

Geological formation, effect on eco- 
nomic hfe, 40; changes in, 46- 
48. 

Germany, money standard in, 480; 
banks of issue in, 523, 524.- 

Ghent system, 667. 

Gold, relation of prices to supply of, 
460, 464-469; new sources of supply, 
475; and silver, changing relations 
of, 476-483. 

Gold certificates, 489. 

Gold standard, evolution of, 477- 
488; in England, 478, 479; in 
Portugal, 480; in Germany , 480; 
in Scandinavia, 480; in Latin 
Union, 480, 481; in Netherlands, 
482; in Egypt, 482; in other coun- 
tries, 483 ; in the United States, 483 ; 
in Mexico, 486; ways of adopting, 
487. 

Good-fellowship system, 445. 

Good- will, 264. 

Goods, the term, 9, 10; free, 11; eco- 
nomic, 1 1 ; indirect or instrimiental 
or production, 212, 278; consump- 
tion, 212; complementary, 243; 
non-reproducible, 262, 265; con- 
simiers', 278; producers', 278. 

Gossen, H. H., 30. 

Government and Wealth, ch. xxxv, 
612-631. # 

Government ownership, conditions of, 
615, 616; fiscal and social monop- 
olies, 616; classes of, 617, 618; 
development of, 618, 619; condi- 
tions of, 619-623. 

Government regulation, 627-629. 

Government, purpose of, 612, 613. 

Gratuitous coinage, 470, 471. 

Greece, ancient, economics of, iio- 
112. 

Green, T. H., 163. 

Greenbacks, 492-494. 

Gresham's law, 473-475. 

Guilds, 92. 



Index 



703 



f^ALES, 116. 

Hamilton, Alexander, 564. 
Handicraft system, 91-93, 96. 
Help system, 90, 91, 96. 
Hire, 205. 

Hire system, 90, 91. 
Historical Forms of Business Enter- 
prise, The, ch. vi, 85-99. 
Historical law, 27. 
Holding corporation, 344, 345. 
Home market, 561. 
Hours of labor, regulation of, 648-650. 

IMMIGRATION, 60, 61, 166, 167. < 

Imports, balance of exports over, 

117; relation to exports, 548-552. 

Income, and capital, 15-19; pleasure 
or benefit, and money, 16, 19; capi- 
talized, 17; fundamental test of 
wealth, 19, 21, 22; taxable, 19; 
measure of wealth, 19, 21. 

Income tax, 19. 

Increasing cost, law of, 252. 

Increasing returns, law of, 253. 

Increment, marginal, 178; and value, 
185-188. 

Independent Treasury System, 538. 

Index number, 461-464. 

India, money standard in, 484, 485. 

Indifference, margin of, 403-405. 

Individual, enterprises carried on by 
96, 97. 

Individual and social cost, 192-194. 

Individual and social value, 179-182. 

Individual competition, 142, 143. 

Individualism, 39, 614. 

Inductive and deductive methods in 
economic investigation, 28, 29. 

Industrial economy, 81-84. 

Industrial Revolution, the, 95. 

Industry, growth of American, in the 
nineteenth century, 102-104; recent 
development of American, 104-106; 
standardization of, 434, 435. 

Infant industry, 563-565. 

Inheritance, right of, 137. 

Inheritance taxes, 137. 

Injunctions, 438, 439. 

Insurance, ch. xxxiv, 598-611; nature 
of, 598-601; growth of, 601-606; 
origin of, 601-603; in antiquity, 
602; marine, 602-605; life, 603- 
605; other forms of, 605, 606; 



theory of, 606-609; productivity 
of, 606, 607; compared with trans- 
portation, 607 ; primary function of, 
607-609; self, 608; methods of , 609,- 
610; policies, kinds of, 610; regula- 
tion of, 611; social, reasons for, and 
forms of, 655-657; accident, 657- 
660; sickness, 660, 661; old age, 
662-664; invaUdity, 664, 665; un- 
employment, 664-668. 

Integration, 341-345. 

Intelligence, transmission of, 572-574. 

Interest, ch. xxv, 394-412; classical 
theory of, in; mediaeval theory 
of, 114, 115; relation to rent, 216; 
contrasted with wages and rent, 
217; as a discount of the future, 
219; meaning of term, 219; rate 
of, 220, 396, 397, 533, 534; and 
efficiency, 266, 267; contrasted 
with profits, 357; nature of, 394- 
397; loan or contract, 394, 395; 
natural or economic, 395; on call 
loans, 397; and forbearance, 398- 
401; and productivity, 401-404; the 
measure of marginal productivity or 
forbearance, 404; tendency of, to 
a minimum, 407-410; regulation 
of, 410-412; contrasted with 
wages, 413, 414. 

International exchange, rate of, 552- 
556. 

International trade, ch. xxxii, 547- 
571; basis of, 547-552. 

Internationalism of science, 689, 690. 

Interstate Commerce Commission, 
595-597, 641. 

Interstate Commerce Law, 588, 592, 

595- 

Inutility, 191. 

Inventions, 82, 94. 

Investigation, economic, methods of, 
28, 29. 

Investment and valuation, 275-277. 

Investment of capital, 329-332. 

Irrigation, 43, 134. 

Isolated economy, 75-77. 

Issue, 505, 508, 509; banks of, 505, 
521-525; monopoly of, 523; de- 
centralization of, 524; of notes, 
under the Federal Reserve Act, 540, 

541- 
Itinerant workmen, 90. 



704 



Index 



JAPAN, money standard in, 483. 
Jevons, W. S., 30, 123, 191, 198, 
199. 
Joint cost, law of, 253-255, 582-584. 
Joint-stock principle, beginnings of, 

97. 
Jurisprudence, 6; relation of econom- 
ics to, 32, 33. 

J^ING, GREGORY, 457- 
Kinley, D., 469. 

LABOR, ch. xix, 288-303; free, 68; 
combinations of, 168; marginal 
efficiency of, and wages, 266, 267; as 
a factor of production, 283-285; en- 
terprise a species of, 284; meaning of, 
288, 289; physical and mental, 288; 
real value of, 289; cost of, 289-291; 
efficiency of, 292, 293; division of, 
nature and advantages of, 293-298; 
defects of division of, 298, 299; 
combination of, 299-301 ; supply of, 
301-303; seasonal demand of, 302; 
concentration of, 335; distinguished 
from other commodities, 415, 416, 
422; monopoly of, 427, 428; or- 
ganizations, 432-437; standardi- 
zation of, 434, 435; lump-of-labor 
doctrine, 436; strikes, 437-440; boy- 
cotts, 440-443; profit sharing, 443- 
446; arbitration and conciliation, 
446-448; hours of, regulation of, 
648-650; Sunday, 648, 649. 

Labor Legislation, ch. xxxvii, 643-654. 

Labor Problem, The, ch. xxvii, 432- 
448. 

Labor theory of private property, 132, 

133- 

Laborers, and capitalists, 289; con- 
trasted with commodities, 415, 416, 
422. 

Laissez faire, 123, 169, 613. 

Land, ch. xx, 304-316; under the 
feudal system, 15; in the American 
colonies, 15, 16; property in, growth 
of, 1 28-131; theories of rights to, 
131-134; content of rights in, 136- 
138; and slavery, 157-163; as a 
factor of production, 283-285; 
304-307; extension of, 305, 308; 
fertility of, 308-311; agricultural 
308, 309; timber, 309; grazing. 



309; mineral, 310; urban, 310, 311; 
situation or geographical location 
of, 3 1 1-3 13; cultivation of, 313- 
316; concentration of, 335. 

Land banks, 546*. 

Land rent, 353; one of many kinds of 
rent, 373-375; relation of, to other 
rents, 375-378; and price, 378-381; 
growth of, 381-385; justification of, 

389-393- 

Land tenure, 385-389. 

Latin Union, the, 480, 481. 

Law, economic, meaning of, 24-28; 
various meanings of, 24, 25; scien- 
tific, 25; natural, 25-27; historical, 
27; of population, 62-66. 

Legal theory of private ownership, 

133- 

Letter of credit, 500. 

Level of prices, international, 548. 
See Price level. 

Limited liability, 97, 98. 

List, Friedrich, 564. 

Lloyd's, 603. 

Loan Associations, 546 *. 

Loans, 396, 411; call, 397; and dis- 
counts, 507. 

Local economy, 78. 

Location, geographical, efifect on 
economic life, 40; changes in, 
46-48. 

Lombard business, 504. 

Lotteries, 617. 

Luxury, 670-674. 

]y[ACHINE system, 327. 

Machinery, invention of, 82, 94; 
saving of cost due to, 296, 297; 
relation to demand for labor, 302; 
saving of time due to, 321, 322; 
farm, 338-341. 

Maine, Sir Henry, 68. 

Malthus, 62-66. 

Manufacturer, the, 94, 95, loi, 121, 
122. 

Manufactures in the United States, 
103-106. 

Margin, economic, 177, 178; specu- 
lating on, 364; of indifference, 403- 
405; of employment, 403, 404. 

Marginal cost, 192, 200; law of, 247- 
249. 

Marginal disutility, 102. 



Index 



705 



Marginal efficiency, 264-268. 

Marginal increments of wealth and 
value, 185-188. 

Marginal utilities, comparative, law 
of, 227. 

Marginal utility, i7S-i79, 185-188, 
199, 213. 

Marginal utilization, 213, 214. 

Market, 224; and normal price, 224, 
225; cornering, 361, 362. 

Market competition, 143. 

Markets, public and private, 619, 620. 

Marriage, group, 86; outside of 
clan, 86, 87; by capture, 88; free- 
dom of, 165, 166. 

Marriage rate, 56-58. 

Marshall, A., 30, 124. 

Marx, Karl, 124, 371. 

Mathematics, relation of economics to, 

30, 31- 

Matriarchate, 85. 

Maximum or marginal cost, law of, 
247-249. 

Meaning of Value, The, ch. xii, 173- 
188. 

Measure of Value, The, ch. xiii, 189- 
203. 

Measure of wealth, 15-19- 

Mediaeval economic theory, 11 2-1 15. 

Mercantile doctrine, the, 116-118. 

Mercantile system, 558. 

Mercantilists, the, 117, 118. 

Metayer plan, 387, 444. 

Methods of economic investigation, 
28, 29. 

Mexico, money standard in, 486. 

Migration of population, 60, 61, 166. 

Mill, J. S., 27, 525; 548, 564- 

Minimum cost, law of, 249-251. 

Minimum Hving wage, 677, 678. 

Minimum wage, 650-654. 

Mint-charge, 471. 

MobiUzation of credit, 541, 542. 

Money, Nature and Value, ch. xxviii, 
449-469; Practical Problems, ch. 
xxix, 470-495; contrasted with 
wealth, 19, 20; classical theory of, 
112; mediaeval theory of, 115; later 
theories of, 116, 117; origin and 
functions of, 449-453; a medium of 
exchange, 449-451, 454-456; a 
standard of deferred payments, 450; 
a store of value, 450; a reserve for 



credit operations, 450; actual and 
ideal, 451; metalUc, 451; paper, 451, 
452, 488-495; representative, 451, 
488, 489; fiat, 451, 452, 490-495; 
fiduciary, 452, 488; standard , 452; 
token or subsidiary, 452, 481, 485, 
486, 491; value of, 453-458; supply 
and demand of, 454-458; general law 
of, 456, 457, 459; quantity theory 
of, 458-460; cost theory of, 460, 
461; and price level, 461-469; dis- 
tribution and stability of, 464-469, 
coinage problems, 470-475; seign- 
iorage on, 470-472; debasement of, 
472, 473; Gresham's law, 473-475; 
the choice of the standard, 475-479; 
bimetalHsm, 479-483; credit, 488; 
soft and hard, 491; bank and gov- 
ernment, 494, 495; lawful, 513; 
coinage of, 619. 

Money economy, 68. 

Money interest, the, 122. 

Money rate, 517, 533-538. 

Monogamy, 88. 

MonometaUism, 68. 

Monopolies, kinds of, 152, 153; regu- 
lators of competition, 152, 153; 
fiscal, 616, 617; social, 617, 618; 
municipal, 623-626. 

Monopoly, 230-234, 236-239, 334; 
buyer's, 231; of labor, 427, 428; 
of capital and wages, 428; of issue, 
523; railways tend toward, 578- 
580; government, 616. 

Monopoly of value, normal, 258-261. 

Monopoly profits, 368, 369. 

Montchretien, 117. 

Multiple standard, 469. 

Mun, Thomas, 117. 

Municipal monopolies, 623-626. 

"NJATIONAL bank system, 530- 

533- 
National competition, 144, 145. 
Natural Environment, The, ch. iii, 

37-48. 
Natural law, 25-27, 119, 132. 
Natural rights theory of private 

property, 132. 
Nature, 132. 
Netherlands, money standard in, 

482. 
Normal and market price, 224, 225. 

45 



706 



Index 



Normal demand, 241-244; and nor- 
mal supply, equilibrium of , 255, 256. 

Normal monopoly value, 258-261. 

Normal supply, 244-247; and normal 
demand, equilibrium of, 255, 256. 

Normal value, determination of, 241- 
261. 

Norman, George W., 525. 

Notes. See Bank Notes. 

QBJECTIVE value, 182, 183. 

Occupation theory of private 

property, 131, 132. 
Occupational disease, 647. 
Open shop, 439. 
Oriental nations, economic theory 

among, 109, no. 
Over-capitalization, 276, 277, 546. 
Over-population, 62-66. 
Overproduction, 544-546. 

PANICS, 543-546. 

Paper money, 488-495. 

Parcels post, 573, 574, 621. 

Partnership, 97. 

Patents, 153, 369, 391. 

Patriarchal family, 87-90. 

Pensions, widows', 663; orphans', 
663; mothers', 663, 664. 

Philippines, money standard in, 485, 
486. 

Phratries, 87. 

Physiocrats, 27, 118-121, 280; 566. 

Picketing, 438. 

Political economy, definition of, 4; 
origin of term, 6, 7; term when to 
be used, 7, 8. 

Politics, 6; relation of economics to, 
31, 32. 

Polygamy, 88. 

Pools, 99, 342, 343, 345, 350. 

Poor Law System, 683, 684. 

Population, The, ch. iv, 49-66; density 
of, 49-52; status of, 49, 50; density 
of, 50-52; distribution of, 50, 52, 
54-57; concentration of, 52-54; in- 
crease of 56-66; migration of, 61; 
the law of 62-66; the problem of, 
65, 66. 

Portugal, money standard in, 480. 

Post-office, the, 572-574, 620. 

Poverty, the facts of, 674-678; the 
causes of, 678-681; the rehef of. 



682-685; the prevention of, 685- 
688. 

Poverty and Progress, ch. xxxix, 669- 
693- 

Power, transmission of, 47. 

Power loom, 94. 

Practice and theory, 28. 

Premium payment system, 445. 

Price, classical theory of, 112; medi- 
aeval theory of, 113, 114; just or 
natural, 113; customary, 113, 151; 
and competition, 142, 235-238; and 
value, 184, 185; means money 
value, 184; and cost, 190; market 
and normal, 224, 225; natural, 225; 
and monopoly, 236-238; demand, 
238, 239; supply, 238, 239; mar- 
ginal, 238, 239; and elasticity 
and inelasticity of demand, 241- 
244; relation to cost of production, 
245, 246; normal, as determined 
by marginal cost, 248-251; and 
joint cost, 254; normal influence 
of, upon market price, 256, 257; 
monopoly,. by what regulated, 258- 
261; and rent, 378-381. 

Price agreements, 341-343, 345- 

Price level, differences in, 461; and 
index number, 461-464; changes in, 
462, 464-466; equilibrium of, 466- 
468; and money rate, 534-536; 
international, 548. 

Prices, revolution in, 116; rise and 
fall of, 185; contrasted with wages, 
rents, and interest, 217; and cost 
of production, 265, 266; and mar- 
ginal efficiency, 268; contrasted 
with wages, 413, 415; relation of, to 
supply of money, 459-461, 464-469; 
retail and wholesale, 462, 463; revo- 
lution of, 468, 477; fluctuations of, 
468, 469; and credit, 518-520; re- 
lation of trusts to, 637 ; the fixing of, 
641. 

Primitive economic activity, 85-87, 

Primitive technique, 69-72. 

Private Propertj'-, ch. ix, 125-138; 119; 
origin of, 26, 125-128; theories of, 
131-134; limits of, 134-136. 

Privileges, 263-265. 

Produce exchange, 363-368. 

Producer's surplus, 194. 

Product sharing, 443, 445. 



Index 



707 



Production, consumption the end of, 
18; of the United States, 104-106; 
classical theory of , 1 10, 1 1 1 ; freedom 
of, 169, 170; relation of social sur- 
plus to, 201-203; cost of, 244-247; 
its meaning and relation to con- 
sumption, 278-281, 286; kinds of, 
281-283; factors of, 283-285, 304- 
307; and the producer, 285-287; 
mass 327; uniformity of, 327, 328; 
interchangeability of, 328; con- 
centration and monopoly of, 334; 
large-scale, 335-338; consolida- 
tion and integration of, 341-345; 
combination and efi&ciency, 345- 
349; relation to distribution, 353. 

Productivity and interest, 401-404. 

Profit sharing, 443-446. 

Profits, ch. xxiii, 352-372; Ricardo's 
theory of, 123; definition of, 353, 
354; ordinary, 354-3S8; nature of, 
354; normal, 354; are a surplus, 
354> 371; a-re unstable, 356; con- 
trasted with interest, 357; a result 
of price, 358; aleatory or chance, 
358-360; contrasted with wages, 
358; industrial and pecuniary, 359; 
speculative, 360-368; monopoly, 
368, 369; regulation and justifica- 
tion of, 370-372; analogy between 
rent and, 376-378; relation to 
wages, 429-431. 

Progress and social surplus, 201- 
203. 

Progressive wage system, 445. 

Promissory notes, 498, 499. 

Property, contrasted with wealth, 20, 
21; advance from common to pri- 
vate, 68; in land, growth of, 128- 

131- 

Property rights, content of, 136-138. 
Protection, rise of, 557, 558; factors 

of, 558; in Great Britain, 558, 559; 

in Germany and Italy, 559; in the 

United States, 559, 560, 570, 571; 

arguments for, 560-565; arguments 

opposed to, 566, 567; criticism of 

arguments, 567-571. 
Protective tariff, 102, 149, 170. See 

Protective tariff. 
Psychology, relation of economics to, 

30- 
Public opinion, 69 1 . 



Public ownership, development of, 

615-619; conditions of, 619-623. 
PubHc utilities, 623-626. 
Pyx, 472. 

QUANTITY theory, of money, 

^ 458-460. 

Quasi-public enterprises, 149, 150. 

Quasi-rents, 218. 

Quesney, 120. 

j^ACE competition, 144 145. 
Race suicide, 66. 

Railway problem, 149, 150. 

Railway rebates, 640, 641. 

Railways, 103; after 1830, 94; esti- 
mate of value of, 273-275; flotation 
of securities of, 275, 276; develop- 
ment of, 575-577; in the United 
States, 575; in Europe,- 575; cost of, 
575; mileage, 575, 576; nature of 
business, 577-580; a quasi-public 
institution, 577, 578; rates and 
fares, 577, 578; tend to become 
monopoly, 578-580; expenses of, 
580; principle of charges, 581-584; 
classification, 584-587; discrimi- 
nation, 584,587-593; regulation of, 
593~5Q7; government ownership 
of> 593 J 594; governmental su- 
pervision of, 594-597; arguments 
against government ownership of, 
622, 623; street, 624-626. 

Rate, money, 517, 533-538. 

Rate of exchange, 227-235. 

Rate of international exchange, 552- 
556. 

Ratio of exchange, 184. 

Raymond, Daniel, 564. 

Reciprocal demand, law of, 227. 

Reference rate system, 445. 

Regulation, and valuation, 273-275. 

Relations, 263, 265. 

Remedy, 472. 

Remittances, 502, 509. 

Remnant, 203. 

Rent, ch. xxiv, 373-393; consumer's, 
195; relation of interest to, 215, 216; 
contrasted with wages, prices, and 
interest, 217, 219; definition of, 217; 
how measured, 217, 218; capital- 
ized, 218; principle, 218; quasi, 218; 
and value, 204-206; definition of, 



7o8 



Index 



205; traditional use of term, 205; 
from land, 205; land or ground, 353, 
381,382; monopoly, 369; nature of, 
373-375; land, one of many kinds 
of rent, 373; traditional law of, 375; 
land, relation of, to other rents, 375- 
378; analogy between profit and, 
376-378; and price, 378-381; 
growth of land, 381-385; land, and 
land tenure, 385-389; contract and 
economic, 386, 387; rack, 387; 
justification of land, 389-393; con- 
trasted with wages, 414. 

Rental value, 206-209, 211, 250-223. 

Reserve banks, 539-543- 

Reserve-capital, 511. 

Reserves, bank, 511-518; centraliza- 
tion of, 539, 540- 

Residual utility, 194. 

Responsibility, 164, 165, 170. 

Restraint of trade, 168. 

Returns, diminishing, law of, 63, 212- 
214, 252, 306, 308, 310, 346, 375, 
402, 419; increasing, law of, 253; 
constant, law of, 253. 

Revolution of prices, 468, 477. 

Ricardo, 121-124, 198, 199, 491; 548- 

Risk, in speculation, 364; application 
of the term, 599; avoidance of, 600; 
and progress, 601. 

Rome, ancient, economics of , 110-112. 

Rural credit, 546 *. 

Russia, money standard in, 483. 

gAFETY Fund System, 530. 

Salaries, 215. 
Sanitation, laws regarding, 647. 
Savings banks, 503. 
Scandinavia, money standard in, 480. 
Science, internationalism of, 688-690. 
Scientific law, 25. 
Securities, speculation in, 362, 363. 
Seigniorage, 470-472. 
Self-sufficing economy, 75-77. 
Sellers and buyers, 229-235. 
Selling bureaus, 343. 
Serfdom, 68, 159-162. 
Serra, 117. 

Services, and commodities, 10; hu- 
man, 214. 
Share system, 387, 388, 444. 
Sherman Act, 638-640. 
Shipping subsidies, 631. 



Short-hand principle, 591, 592. 
Silver, new sources of, 475; and gold, 
changing relations of, 476-483; free 
coinage of, 480-483. 
Silver certificates, 489. 
Silver standard, in India, 484, 485; in 
the Philippines, 485, 486; in Pana- 
ma, 486; in Mexico, 486; in the 
Straits Settlements, 486, 487; 
countries still under, in 1914, 487. 

Single-tax, 393. 

Single-taxers, 391. 

Sinking fund, 208, 211. 

Slavery, 68, 103, 287; in Greece and 
Rome, no, 157, 158; in mediaeval 
times, 113; beginnings of, 127; ex- 
tended, 128; origin and growth of, 
154-158; dependence on free land, 
iS7> 158; in America, 157, 158, 160; 
decay and disappearance of, 158- 
163; traditional defence of, 162. 

Smith, Adam, 34, 76, 118-121, 224, 
297, 318, 425; 566. 

Social and individual cost, 192-194. 

Social and individual value, 179-182. 

Social economics, 7. 

Social Insurance, ch. xxxviii, 655-668; 
the reasons for, 655-657; forms of, 
657; accident, 657-660; sickness, 
660, 661; old age, 662-664; in- 
validity, 664, 665; unemployment, 
665-668. 

Social Hfe, 35. 

Social science, 6. 

Social solidarity, 164. 

Social surplus and progress, 201-203. 

Social utility theory of private prop- 
erty, 133, 134- 

Socialism, 136; bearing of Malthus's 
doctrine on, 62; theory of, 613, 
614; one-sided, 614, 615; as a 
remedy for poverty, 686. 

Sociology, 6. 

Specialization, 293-299. 

Speculation, 360-368; one function 
of, to avoid risk, 600. 

Spencer, Herbert, 68, 163, 293. 

Spinning frame, 94. 

Spinning jenny, 94. 

Standard, multiple, 469; tabular, 469; 
choice of, 475-479; evolution of 
gold, 477-488; limping or halting, 
480, 481, 487; adoption of gold, 



Index 



709 



in various countries, 479-488; gold- 
exchange, 485-487. 

Standard Oil Company, 236, 237, 261, 
343, 639, 640. 

Standardization, of labor, 434; of in- 
dustry, 434, 435. 

Standing rent method, 388. 

Staple towns, 557. 

State, the, 7, 130. 

State banks, 522, 524, 532. 

Static conditions, 225. 

Statistics, relation of economics to, 31. 

Steam engine, 94, 121. 

Steamship, after 1830, 94. 

Stock exchange, 363-368. 

Stocks, 330, 331. 

Stock-watering, 275, 276. 

Straits Settlements, money standard 
in, 486, 487. 

Strikes, 437-440. 

Subjective value, 182, 183. 

Subsidies, 629-631. 

Substitution, principle of, 142. 

Suffolk Bank system, 529. 

Sugar bounties, 629-631. 

Sumptuary laws, 169. 

Sunday labor, 648, 649. 

Supply, 189, 190; limitation of, char- 
acteristic of wealth, 11, 12; and de- 
mand, 199, 223, 224, 241, 244-247, 
416; elasticity of, 251-253; con- 
stant, 251; joint, 253; and demand, 
normal, equilibrium of, 255, 256; of 
labor, 301-303; of money, 456-458. 

Supply price, 238. 

Surplus, and cost, 194-198; produ- 
cer's, 194; consumer's, 194; of 
utility, 194-198; and value, 195- 
198; social, and progress, 201-203. 

Sweating, 472. 

Sweatshops, 648. 

Symmetallism, 476. 

Syndicates, 506. 

"pABOO, 87. 

Tabular standard, 469. 
Tariff, protective, 102, 149, 170; 

origin of the term, 557; relation 

to trusts, 633, 634. 
Taxable income, 19. 
Taxation, of inheritances, 137; and 

valuation, 269-273; of corporations, 

269, 270; of general property, 270, 



271, 273; diffusion of, 271; influ- 
ence of capitalization on, 271, 272; 
elision of, 272. 

Technique, primitive, 69-72. 

Telegraph, 574, 621. 

Telephone, 574, 622. 

Tenure, land, 385-389. 

Theory, alleged antithesis to practice, 
28. 

Third and fourth system, 388. 

Tobacco trust, 639, 640. 

Tontine annuities, 604. 

Torrens, 666. 

Totem worship, 87. 

Trade, freedom of, 170; internal and 
international, 547, 548. See Inter- 
national trade. 

Trade agreement, 447. 

Trade Disputes Act, 442. 

Trade dollar, 453. 

Trade economy, 77-81. 

Trade-mark, 263, 265. 

Trade unions, 168; apprenticeship 
regulations of, 167, 168, 436, 437; 
restriction of membership by, 302; 
rise of, 433, 436, 437; in the United 
States, 433; justification of, 433; 
militant and fraternal, 433; stand- 
ardizing tendencies of, 434, 435; 
restriction of output by, 435-437; 
strikes, 437-440; closed and open, 
439; boycotts, 441-443; and trusts, 

635- 

Trading companies, 97. 

Tramways, 624-626. 

Transmission of intelligence, 572-574. 

Transportation, ch. xxxiii, 572-597; 
effect of improvements in, 46-48. 

Treasury certificates, 490. 

Treasury notes, 490. 

Trial of the pyx, 472. 

Tribes, 87 

Truck system, 76, 650. 

Trust, origin of the term, 99. 

Trust companies, 504. 

Trusts, 97, 99, 153, 343; the causes of, 
632-634; relation of tariff to, 633, 
634; object of, 634, 637; effect of, 
634-638; advantages and evils of, 
638; question of size, 638; prohibi- 
tion of, 638-640; regulation, 640- 
642. 

Turgot, 116, 120, 121. 



j\o 



Index 



UNDERCONSUMPTION, 544, 

545- 

Undertaker, the term, 85; 

Unearned increment, 392, 393. 

Unemployment, 664-668. 

Union label, 440. 

United States, economic develop- 
ment of, 100-108; money standard 
in, 483; government banks in, 522; 
banks of issue in, 524; exports and 
imports of, 551; protective tariff 
in, 559, 560; railways in, 595. 

United States Steel Corporation, 
347-349. _ 

Use, value in, 182, 183. 

Usury, 410, 411. 

Usury doctrine, 114. 

Utilities, conferred by objects and 
services, 10, 11; law of compara- 
tive, 226, 227; comparative mar- 
ginal, law of, 227; relation of con- 
sumption and production to, 278- 
281; material or form, 281; place, 
281, 282; time, 282. 

Utility, definition of, 9; grade of, which 
results in value, 11; marginal, 175- 
179, 185-188, 213; law of dimin- 
ishing, 175-179; total, 176, 177, 
179, 181; effective, 176, 177, 179, 
181; final, 176; individual and 
social, 179-182, 200; indirect, 
180-182, 193; residual or surplus. 
194; surplus, 194-198; social, 
equivalence with social cost, 197, 
198; and cost, 198-201; ultimate 
cause of value, 201; law of dimin- 
ishing, 212-214. 

Utilization, margin of, 213, 214. 

yALUATION, and taxation, 269- 
273; and regulation, 273-275; 
and investment, 275-277. 

Value, definition of, 11, 201; and 
wealth, 12; original meaning of, 
173-175; kinds of, 174; relation 
to marginal utility, 179, 180; in- 
dividual and social, 179-182; in 
exchange, 182-184; in xise, 182, 
183; subjective and objective, 182, 
183; and price, 184, 185; and 
marginal increments of wealth, 
185-188; measure of, 189-203; 
relation to cost, 190, 198, 199; 



social nature of, 193; as depend- 
ent on social cost, 193, 200; and 
surplus, 195-198; as dependent on 
limitation, 199; is expression of re- 
lation between demand and supply, 
200; capitalization of, 204-222; and 
rent, 204-206; rental, 206-209, 
211, 220-223; property, 206; capi- 
tal, and rental, 206-209, 211, 220- 
223; of producers' goods, 212; is 
reflected back to original agent, 
212; fundamenta,l law of, 212; 
forms of, 214-217; as a differential, 
217-220; determination of market, 
223-240; depends on demand and 
supply, 223; determination of 
normal, 241-261; normal, and 
cost of production, 250, 251; the 
general law of, 262-277; of non- ' 
reproducible goods, 262-264; of 
relations and privileges, 262-264; 
and efficiency, 265-268; funda- 
mental explanation of, is marginal 
efficiency, 265; of corporations, 
measurement of, 274; normal, by 
what regulated, 255, 256; normal 
monopoly, 258-261. 

Value of service, 255. 

Varying Cost, law of, 251-253. 

Ventilation, laws regarding, 647. 

Vested rights, 136. 

Village economy, 78. 

Vocational schools, 667. 

Von Baer, 293. 

"\/y^AGE, the minimum, 650-654; 
minimum living 677, 678. 

Wages, ch. xxvi, 413-431; bear- 
ing of Malthus's doctrine on, 
62; always income, 215; con- 
trasted with prices, rents, and in- 
terest, 217; law of, 218, 416; and 
efficiency, 266, 267, 418-421; rela- 
tion to cost, 289, 416-418; con- 

■ trasted with profits, 358; monopoly, 
369; nature of, 413-416; contrasted 
with prices, 413, 415; contrasted 
with interest, 413, 414; contrasted 
with rent, 414; rate of, 414, 415, 
421, 422; money and real, 415; 
cost-of -production theory of, 417; 
minimum-of-subsistence theory of, 
417; iron or brazen law of, 417," 



Index 



711 



wages-fund theory of, 417, 4iS; 
paid out of product, 418; stand- 
ard-of-life theory of, 421-423; 
productivity theory of, 421; 
course of, 423-425; differences 
between actual and normal, 425- 
429; relation to profits, 429-431; 
and protection, 561-563; and 
trusts, 634, 635. 

Wages-fund theory, 29, 65, 417, 418. 

Wage-work, the term, 90. 

Walker, F. A., 124, 376. 

Walsh, C. M., 469. 

Waterworks, 624, 625. 

Wealth, meaning of, 8-13; character- 
istics of, 8- II, 13; original mean- 
ing of word, 8; intangible, 10; 
definition of, 11, 13, 19; an abun- 
dance of things limited in supply, 



12; and value, 12; and man, 13-15; 
a surplus of satisfactions, 14; the 
measure of income and capital, 15- 
22; contrasted with money, 19, 
20; contrasted with property, 
20, 21; public and private, 21- 
23; and population, antithesis 
between, 64, 65; right of accu- 
mulation of, 137, 138; limitation 
of, 138; duties of, 138; marginal 
increments of, and value, 185-188; 
concentration of, 334. 

Weighting, 463. 

Widows' pensions, 663. 

Women, employment of, 643-646. 

Workmen, itinerant, 90; rise of in- 
dependent class of, 91; and em- 
ployers, 289. 

Workmen's compensation, 658-660. 



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